Mistake - Deferral put into IRA

During 2016,  a  $4000 deferral by the  owner of a company was incorrectly put into an old IRA rather than into his 401k account. This error was discovered during year end reconciliation and preparation of the 5500 in early 2017.  The error was made by the asset platform/broker's office.  However, now to transfer the funds, they want us as the TPA to write a letter saying something like "the plan accepts this rollover".  There should not be a rollover, since it never should have been put into the IRA.  Has this happened with any of your clients, and how was it resolved?  .  The asset provider is wanting to prepare a 2017 1099R.   Again, they made the initial mistake of putting it into the IRA.   Now we are supposed to jump through hoops to cover them.  Thoughts?  

Once money goes into an IRA, it's near impossible to get the IRA custodian to fix it without issuing a 1099-R.  Unfortunately, it sounds like it is not their fault, but the broker's fault, and my experience with brokers is that you're going to have to tell them exactly and precisely how to fix this, and then cross your fingers that they don't screw it up again anyway.

I think - and it requires some more research and/or someone else confirming - that the participant needs to take it out as an excess contribution.  That way the custodian is treating it as never deducted in the first place and not taxable when distributed.  Although...I just re-read your message and I think it is too late for that now, sigh.  I suppose you could consider whether treating it as a rollover gets the participant to the same place and whether you want to go along with that charade.  It's probably the only practical solution at this point.  I doubt you'll get the custodian to treat it as if it never happened.

What, for tax purposes, is the employer entity that maintains the 401k plan?  A corporation, partnership or unincorporated sole proprietorship?  Unless it was an unincorporated sole proprietorship there is no argument to be made in support of this having been a 2016 401k elective deferral.   

Is there a record (e.g., an elective deferral election form for 2016, or an electronic record) of the individual's having elected a 401(k) deferral with the plan administrator? If so, then, although this is somewhat sensitive to the issue that jpod is raising as to whether the employer is a sole proprietor vs. entity, the employer is probably required to follow through and make the contribution.

The IRA is a separate issue. If he was entitled to make the contribution as deducitble, nondeductible, Roth, or whatever it was, then that is what it is, and the money should come out subject to the IRA withdrawal rules and tax regime. If it was an overcontribution, then it should come out as that.

They are a professional service corporation.  The doctor  puts in the $24,000 every year.  There were deposits of $20,000 into the correct 401k account with the SAME brokerage firm they have used for many year, and somebody got lax at the broker's office,  and accidentally deposited the $4000 into an OLD IRA.   It seems like a simple fix on the front end, but apparently someone else's mistake is causing the doctor to have to possibly amend his 2016 1040;  etc

As I mentioned above, The broker's "back office"  wants to show a rollover from the IRA to the plan.  Is there no self correction program to avoid doing 1099Rs; amended tax returns, etc?

Frustrating to say the least when it was the broker's error and they were supposed to have fixed it a year and a half ago.  I only noticed it when I was doing  the plan's year end work that it was still outstanding to the 401k Plan.  It took the broker a long time to even find the $4000. 

Fun times.

OK, so I think the professional corporation must get the $4,000 into the K plan, since it was deferred, and the brokerage needs to refund the $4,000 out of the IRA as a mistaken deposit. Assuming the check for $4,000 was written on an account of the professional corporation, and not the individual shareholder, it is just a correction of an error and would not require a 1099-R, since the money would be going back to the professional corporation. 1099-R reporting is required only for distributions to the IRA owner.

12 hours ago, Luke Bailey said:

Assuming the check for $4,000 was written on an account of the professional corporation, and not the individual shareholder, it is just a correction of an error and would not require a 1099-R, since the money would be going back to the professional corporation. 1099-R reporting is required only for distributions to the IRA owner.

You're absolutely right.  All I can say is "good luck" getting the custodian to accept this and process it.  It should be do-able but someone will have to be persistent.

Right, Bird. My luck on this has varied greatly.

So far they are insisting on doing a 1099R....arrggghhh

Thank you so much for your replies.  It helps me with my argument...