cross tax correction

Looking for some help on cross tax plan correction.  For one of the terminating plan the benefit was paid to estate however looks like there was a named beneficiary (spouse).  The check was cut to the deceased estate in 2023 and the spouse reached out in Feb 2024, the spouse wants to rollover the funds to an IRA and wants the account to be made whole.  Since we are in April is there any exceptional rules that we can use to have the tax corrected?  the taxes withheld is $80000. 

Is the estate going to return the money to the plan? 

If the plan withheld too much , then an amended Form 945 can be filed and  the IRS will issue a refund to overpayment on the tax. 

then the plan would have the $$ (back from the estate, and the IRS) to do the rollover distribution to the spouse. 

The plan might have an obligation to the spouse regardless, even if the plan doesn't recover the money from the estate /IRS. 

What kind of plan was it? Did a death certificate mention a spouse? Why was the estate paid? Usually an estate is only paid (if a qualified retirement plan) as a last resort, or there is an actual beneficiary designation on file that the spouse consented to the estate being the beneficiary. 

1 hour ago, justanotheradmin said:

Is the estate going to return the money to the plan? 

If the plan withheld too much , then an amended Form 945 can be filed and  the IRS will issue a refund to overpayment on the tax. 

then the plan would have the $$ (back from the estate, and the IRS) to do the rollover distribution to the spouse. 

The plan might have an obligation to the spouse regardless, even if the plan doesn't recover the money from the estate /IRS. 

What kind of plan was it? Did a death certificate mention a spouse? Why was the estate paid? Usually an estate is only paid (if a qualified retirement plan) as a last resort, or there is an actual beneficiary designation on file that the spouse consented to the estate being the beneficiary. 

The check is outstanding and the spouse has the check.  Its a qualified retirement plan, we are trying to obtain the death certificate and the plan document states its spouse and estate incase there is no beneficiary form. 

Who decided to pay out to the estate? who signed on behalf of the estate?

If the plan administrator doesn't have a beneficiary form, usually one of the first questions for a death distribution is - Is there a surviving spouse? Did someone answer no to that question?

The check should be voided(it might be stale anyhow since its more than 4 months old), the plan should get the tax withholding back from the IRS,  the form 945 and 1099-R need to be amended for 2023. then the spouse needs to elect a distribution, and the plan needs to do a new check to the spouse's IRA if that's what they are choosing. 

Step 1. Unwind the incorrect distribution

Step 2. Do the correct distribution

Step 3. Figure out what went wrong and change processes and procedures so it doesn't happen again

Step 4. Document EVERYTHING

Review with ERISA counsel every step of the way if there is any uncertainty. EPCRS has standard correction methods for incorrect distributions. 

13 minutes ago, justanotheradmin said:

Who decided to pay out to the estate? who signed on behalf of the estate?

If the plan administrator doesn't have a beneficiary form, usually one of the first questions for a death distribution is - Is there a surviving spouse? Did someone answer no to that question?

The check should be voided(it might be stale anyhow since its more than 4 months old), the plan should get the tax withholding back from the IRS,  the form 945 and 1099-R need to be amended for 2023. then the spouse needs to elect a distribution, and the plan needs to do a new check to the spouse's IRA if that's what they are choosing. 

Step 1. Unwind the incorrect distribution

Step 2. Do the correct distribution

Step 3. Figure out what went wrong and change processes and procedures so it doesn't happen again

Step 4. Document EVERYTHING

Review with ERISA counsel every step of the way if there is any uncertainty. EPCRS has standard correction methods for incorrect distributions. 

The plan sponsor directed to pay the estate.  It was not exactly paid to the estate a check was just cut to the deceased estate, the spouse has reached out claiming for the benefits.  Will this fall under form 945? because this is more of administration error.  

What is your relationship to the plan? Are you the financial advisor? TPA?

When a distribution is processed from a retirement plan, the plan files and reports a Form 1099-R. If there are distributions that had withholding the plan also files a Form 945 with the IRS. In this case a Form 1099-R would have been filed with the IRS showing the gross amount as taxable income for the estate. 

The distribution should be undone - which means the money should be returned, and amended 2023 1099-R and 2023 Form 945 need to be filed. The estate's tax identification number would be on the 1099-R as well. 

Why did the sponsor decide to pay the estate? Do they have someone who usually helps guide them through distributions? 

Typically the estate would have needed to request the distribution by completing a distribution form. Someone who is the legal representative of the estate signs that form. Then the plan goes through it's distribution process/checklist. 

Once the incorrect distribution has been undone - including filing amended tax forms - then the correct distribution can be done. and please get an experienced administration firm or professional to help because there are standard things that are done when distributions are requested. Like having the participant (or in this case default beneficiary) fill out a formal request, disclosures, possible death certificate, etc. 

14 hours ago, justanotheradmin said:

What is your relationship to the plan? Are you the financial advisor? TPA?

I'd really like to know the answer to this. PS, you come up with some really bizarre situations that just "happened" as if by random chance.

The practical problem is that the IRS has $80,000 in error. There is a way to get it back but I never had to figure it out so don't know. But that's what has to happen, along with corrected reported as noted above.

The real problem is that someone didn't think enough about the ramifications of paying the estate and withholding $80,000 (!). I think we would all be curious to learn how this could happen.

FWIW I have never heard the term "cross tax correction."

23 minutes ago, Bird said:

I'd really like to know the answer to this. PS, you come up with some really bizarre situations that just "happened" as if by random chance.

The practical problem is that the IRS has $80,000 in error. There is a way to get it back but I never had to figure it out so don't know. But that's what has to happen, along with corrected reported as noted above.

The real problem is that someone didn't think enough about the ramifications of paying the estate and withholding $80,000 (!). I think we would all be curious to learn how this could happen.

FWIW I have never heard the term "cross tax correction."

My apologies! it's cross year tax correction. 

Terminating this plan really took a toll on us, nearly worked for 5 years in terminating this plan.  After serval on and off situation the client decided to start the process, during the termination they made many changes and wanted to have it closed by 2023 and I believe that is where it went wrong because there were few deceased account which would HOLD the plan from being opened hence the client decided to direct to cut a check to the estate. 

   I'm trying my best to find a way to see how this can be corrected and I appreciate all the help and guidance.  Any section in IRS that can furnish more detail on the correction? 

The tax withholding would have been reported on the Form 945.  If this was within the last 3 years, then consider filing a Form 945-X. 

You can find the instructions here:  https://www.irs.gov/pub/irs-pdf/i843.pdf

13 minutes ago, Paul I said:

The tax withholding would have been reported on the Form 945.  If this was within the last 3 years, then consider filing a Form 945-X. 

You can find the instructions here:  https://www.irs.gov/pub/irs-pdf/i843.pdf

great!  thank you. 

Also - its not as simple as the spouse cashing the check or sending it to their IRA. the estate got a 1099-R showing the gross taxable amount. it needs to be amended. and the check voided, and then a new check issued for the spouse's distribution. 

It's as if a W-2 was issued to the wrong person. just sending money to the right person and giving the right person a W-2 doesn't fix the tax situation for the wrong person. The IRS is still going to think the estate has those $$ as income and is going to want to see the taxes on it. The Form 945 is only one part of it. and yes, the IRS can send the $80,000 back, but it will go back to the PLAN, not the spouse. That's part of unwinding the incorrect distribution. 

Also- the plan has a responsibility to make sure the distribution occurred correctly. the estate signing over the (likely stale) check to the spouse or their IRA does not accomplish that at all. Given that the amount involved sounds substantial, the correction should really be handled carefully.