Excess Roth IRA Contribution

I have one that I haven't seen before.  A university erroneously sent student loan money to a student's Roth IRA account, instead of her bank account.  The student has a student job at the university and contributes a small amount of her small paychecks to the Roth IRA.  That's how the university has her Roth IRA account on file.

The university admits it made the error by sending loan money to the IRA (they also have her personal account on file for direct deposit purposes), but states that it is unable to pull back the funds (and that its bank is unable to pull back the funds).  Naturally, although the amounts were contributed as Roth IRA contributions, the university didn't tax the loan money before it was sent to the IRA provider.  The entire gross loan amount was sent to the Roth IRA.

The IRA provider is willing to distribute the erroneously contributed amount to the student's personal bank account as an excess contribution.  My understanding from the IRA provider is that the principal distributed as the excess contribution won't be reported as taxable income to the student.  However, any earnings on the principal that will be distributed will be taxable and subject to a 10% penalty.

Am I missing anything for the student that might rub the IRS the wrong way?  The poor kid just needs her student loan money.  The university is also willing to pay any taxes that the student incurs.

Why can't they unwind this? They erroneously made deposits. That said I don't see where the IRS would have an issue with the proposed correction.

Thanks. I agree that this should be reversed. But, I first tried that avenue and got nowhere with the IRA provider. The university also said their bank wouldn’t ask for it back. Since the erroneous contribution and the distribution will both occur this year (within two weeks of each other), the earnings should be relatively minimal even with the uptick in the market. 
In the long run, the excess distribution will also likely be faster than waiting for the financial institutions to coordinate.

A return of excess is the only way for the 'correction' to be done on the IRA side.

On 1/23/2025 at 3:50 PM, ROCPost585 said:

I have one that I haven't seen before.  A university erroneously sent student loan money to a student's Roth IRA account, instead of her bank account.  The student has a student job at the university and contributes a small amount of her small paychecks to the Roth IRA.  That's how the university has her Roth IRA account on file.

The university admits it made the error by sending loan money to the IRA (they also have her personal account on file for direct deposit purposes), but states that it is unable to pull back the funds (and that its bank is unable to pull back the funds).  Naturally, although the amounts were contributed as Roth IRA contributions, the university didn't tax the loan money before it was sent to the IRA provider.  The entire gross loan amount was sent to the Roth IRA.

The IRA provider is willing to distribute the erroneously contributed amount to the student's personal bank account as an excess contribution.  My understanding from the IRA provider is that the principal distributed as the excess contribution won't be reported as taxable income to the student.  However, any earnings on the principal that will be distributed will be taxable and subject to a 10% penalty.

Am I missing anything for the student that might rub the IRS the wrong way?  The poor kid just needs her student loan money.  The university is also willing to pay any taxes that the student incurs.

The 10% penalty no longer applies. SECURE Act 2