defined benefit to IRA rollover problem
Situation involves a husband/wife consulting firm, they had a defined benefit plan that contained both of their contributions within one account. At termination of the plan, all of the assets were rolled into the husband’s IRA, rather than being split between the two participants.
This was in tax year 2009. Thought was to communicate with the IRS about this situation, and remove the percentage of the IRA account that belongs to the wife and put it in her IRA.
Brokerage firm holding the husbands IRA would code this as an ordinary withdrawal from the husbands IRA and a rollover to the wife, so it would be very noticeable to IRS: wondering if communicating with the IRS in advance is possible in this situation, and what stance they would take.
Thanks
Permalink Submitted by Alan Spross on Sat, 2011-04-30 00:21
Having no idea how the error was made or who was responsible, quite possibly if the plan administrator made the error, the solution is included in this paragraph copied from Revenue Procedure 2008-50 which deals with voluntary plan correction procedures among other things:
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(3) Correction of Overpayment failures. An Overpayment from a defined benefit plan is corrected in accordance with the rules in section 2.04(1) of Appendix B. An Overpayment from a defined contribution plan is corrected in accordance with the Return of Overpayment method set forth in this paragraph. Under this method, the employer takes reasonable steps to have the Overpayment, plus appropriate interest from the date of the distribution to the date of the repayment, returned by the participant or beneficiary to the plan. To the extent the amount returned to a defined contribution plan is less than the Overpayment adjusted for earnings at the plan’s earnings rate, then the employer or another person must contribute the difference to the plan. The Overpayment, adjusted for earnings at the plan’s earnings rate to the date of the repayment, is to be placed in an unallocated account, as described in section 6.06(2), to be used to reduce employer contributions (other than elective deferrals) in the current year and succeeding year(s) (or if the amount would have been allocated to other eligible employees who were in the plan for the year of the failure if the failure had not occurred, then that amount is reallocated to the other eligible employees in accordance with the plan’s allocation formula). In addition, the employer must notify the employee that the Overpayment was not eligible for favorable tax treatment accorded to distributions from Qualified Plans (and, specifically, was not eligible for tax-free rollover).
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If the above applies, then the rollover to his IRA is an excess IRA contribution due to incorrect rollover information and can be withdrawn as a post due date excess contribution, with a 6% excise tax incurred for 2009 and 2010 for the IRA excess contribution. Otherwise, the distribution is tax and penalty free. But the plan will have to determine if recovering the funds and then transferring to her IRA account is the correct approach to take. I only suggest this as a possibility since this sounds like an overpayment of his benefit at her expense.