Removal of Excess Rollover
A client received notice from his former 401(k) plan custodian that they had made an error on the rollover check they sent last March. The want the error ($400) returned to them. Can you please confirm whether he is required to return earnings on that amount as well, just as is done for a return of excess contribution? The client is not inclined to do so because the notice was not explicit to return principal and earnings. Thank you for your help!
Permalink Submitted by Alan Spross on Wed, 2009-09-30 21:35
Any allocated earnings do not have to go back to the 401k plan, but they do have to come out of the IRA as in a typical excess contribution correction. The earnings will be taxable and an early withdrawal penalty will apply unless there is a penalty exception. But client keeps the amount in excess of the $400 that must be returned to the plan.
Since this all takes place this year, the 1099R received from the plan should include the $400 adjustment, and if so, just report the direct rollover of the net amount in the usual manner on line 16 of Form 1040. The IRA custodian will also issue a 1099R showing correction of an excess contribution to the IRA including earnings. Again, only the earnings are taxable, not the $400 portion.
Of course, client also should receive a clear explanation of the nature of the error before acting on it as above. There might be an odd combination of infractions that led to this adjustment, but client should try to get an idea of what the 1099R will show next January for the direct rollover as well as any additional 1099R forms that may result.