RMD Rolled Over

I have a custodian who did a total distributions this year (2022) for two people (both NHCEs both had RBDs of 4/1/2023) that were rolled over but each had a RMD that was supposed to be processed prior to rollover.

I'm pretty sure the fix is that the participants need to be instructed to remove the RMD plus earnings from their IRA as an excess IRA contribution and the Plan needs to issue two 1099-Rs one for the taxable amount of the RMD with code 7 and the other the rollover for balance. Is this the correct fix?

Is this an eligible fix under self correction or does it require VCP filing? It's not like the Plan can make an RMD from their remaining balance as the remaining balance is now $0.00.

I don't think it requires a filing. IMO if you issue a 1099-R showing the RMD as a taxable distribution that "fixes" it (technically the plan did nothing wrong as the RMD was indeed distributed; it's the participant who rolled it over improperly).

I agree you wouldn't need a VCP for this and that the plan's fix is just to fix the 1099-R and notify the participant that the rollover of the RMD was made in error.

As far as the assertion that the plan did nothing wrong, I think the distributing plan should have known that a portion was an RMD and provided a tax withholding notice and election for non-periodic payments (e.g., W4-R) on the portion that was not eligible for rollover. I would not expect a participant to know these things. 

There is a penalty for not providing that withholding election notice. There is also the fact that they didn't withhold at the default rate of 10% on the RMD - so the employer could be held to accountable for that amount if the participant doesn't pay the tax. (In practice, IRS rarely catches plans and assesses these penalties). 

I am not absolutely sure it is going to be an excess IRA contribution for 2022 (and there is still time to remove it before the end of the year, if necessary). It is certainly not a rollover contribution for 2022 - but if the RMD amount is less than $7,000 ,it is at least conceivable that all or a portion of the RMD could be recharacterized by the participant from a rollover contribution to a regular IRA contribution if the participant didn't already contribute the $7,000 max to an IRA (including the RMD amount) and had the 2022 earned income necessary to support that regular IRA contribution. The participant would probably need to contact the IRA provider to find out how they could recharacterize the RMD portion of the contribution and how they can get the RMD removed from their account (either to avoid an excess contribution, or if they didn't want to make the regular IRA contribution to that account). 

Agree correcting the 1099-Rs is the appropriate 'fix'. We find that most times the checkwriter refuses to do that because that's not how the payment was physically made. Also, when the person does remove the excess contribution from the IRA, what type of 1099-R do they get from the IRA...does it indicate it's not taxable because the distributing institution should be providing a 1099-R for the RMD portion indicating it was taxable.

20 minutes ago, ALS said:

Also, when the person does remove the excess contribution from the IRA

That is important as you don't want plan and IRA issuing 1099R for same taxable distribution. The Plan Administrator should write letter to IRA custodian explaining the error. The IRA custodian may not be able to distribute out to the individual w/o tax reporting, in which case the request should be to return to the plan which can then make the proper RMD distribution.

Agree with bito too that this was indeed a plan/administrator/trustee/custodian mistake/problem/issue because the plan is required to split the distribution and properly satisfy its RMD requirements under the terms of the plan. Therefore, whichever entities/functions made this ill-advised lateral should fix it before the IRS recovers and runs back for a game winning TD against the Patriots, I mean the participant.

On 12/20/2022 at 6:59 PM, Lou S. said:

I'm pretty sure the fix is that the participants need to be instructed to remove the RMD plus earnings from their IRA as an excess IRA contribution

This is correct. if done by tax filing due date for the year of the rollover, plus extension, the 1099-R would show only any earnings as taxable.  The amount would be distributed to the IRA owner ( not returned to the plan)