There's always something...

Got asked this question today:

Owner of company requested an in-service withdrawal for $10,000  (numbers are rounded and fictional). Received two checks, one for $8,000 and one for $2,000. Owner then turned around and ran the $8,000 through payroll, taking no withholding or taxes whatsoever on it. And then, to top it off, remitted the $2,000 through EFTPS as a Form 945 tax.

The owner got forms from their payroll provider as to how to "correct" the error. I looked at them and have no idea what they want this individual to do. Has anyone ever encountered a situation like this?

Thanks for any replies.

It sounds like the plan is not held at a recordkeeper, is that correct? Either a pooled plan or self-directed brokerage or similar?

I think the trick is to "un-do" the payroll aspect of this, either by physically returning it, or maybe leave it alone and take a different $8000 that would have gone through p/r and just taking it directly. Yeah it shouldn't have gone through the company but it's essentially a PT that is pretty much immediately corrected.

Assuming/hoping that the EFTPS processing was done under the plan's number. If not, the easiest way out is to file the 1099 under the number it was paid and hope for the best. I don't know how to get that money re-assigned.

2 hours ago, Bird said:

Assuming/hoping that the EFTPS processing was done under the plan's number. If not, the easiest way out is to file the 1099 under the number it was paid and hope for the best. I don't know how to get that money re-assigned.

Maybe not "reassigned", but "corrected" -- should be possible to submit a second payment through EFTPS using the plan's number, and then report the $2000 originally paid under the employer's EIN with the next 941.  That would either offset other amounts due/paid, or will result in an overpayment, which should be refunded to the employer. 

Maybe that's the gist of what the payroll provider is trying to do?

37 minutes ago, Lois Baker said:

Maybe not "reassigned", but "corrected" -- should be possible to submit a second payment through EFTPS using the plan's number, and then report the $2000 originally paid under the employer's EIN with the next 941.  That would either offset other amounts due/paid, or will result in an overpayment, which should be refunded to the employer.

In theory you're right but I would rather leave things wrong and explain it later than give them another $2K and try to get the first one back out of the bowels of the EFTPS system. We've accidentally mis-paid and/or mis-reported and been able to respond to their inquiries and sort it out. The lesson learned, of course, is to take extra, extra care to do it right the first time. Not that I'm blaming the original poster; of course someone else went rogue here. Having said that, if you take the position that anything that goes wrong is your fault, you develop a sixth sense for heading things off at the pass.

22 minutes ago, Bird said:

In theory you're right but I would rather leave things wrong and explain it later than give them another $2K and try to get the first one back out of the bowels of the EFTPS system.

Sure -- I was more suggesting that the $2000 could be applied against the next deposit, and then reconciled on the 941.  Or it can be reported as an overpayment, and check the box on the 941 to apply it to toward the next payment.  Either way works, and doesn't require any refund or extra cash outlay (since they'd be paying with the 941 anyway).

That assumes, of course, that they would have additional payroll taxes due/deposited soon-ish.