401k Accounting Error – Reclaim Efforts

Submitted by Mitch on Wed, 2018-10-24 15:26

The client was laid off December 2017. The employer miscalculated his severance package and funded an additional $2,903 into his 401k. His total contribution for the year was still well below the threshold, but he was not due this additional money. The company has contacted him via phone/mail asking him to return the funds.

Problem: At termination, he rolled his 401k into an IRA at the same plan custodian. He has since transferred the IRA away from the original custodian to a new custodian.

So the employer cannot “reclaim” the funds from the original plan custodian b/c the account no longer exists there.

The client is over 59 1/2 and would have to WITHDRAW the funds from his current IRA and re-imburse the employer. This would create a taxable event at the current IRA custodian. He would then have to “explain away” the situation on his 1040 (if this is even possible.)

I’ve contacted the plan administrator at the previous employer and she says there’s no “Tax Exempt Document” she’s aware of and really doesn’t know what to do under the circumstances. She says she’s been counseled that there really is no recourse the company can take and , if the parties can’t work out a viable solution, then the company will just write off the incident.

Any ideas?



Submitted by Alan - IRA critic on Wed, 2018-10-24 16:55

Many such incidents of overpayment are written off after an initial request is not complied with.  However, if client wants to comply they need to know what the 401k plan intends to do regarding 1099R forms. Some of these overpayment reimbursements end up with participants being taxed on amounts they eventually returned to the plan. Client would need to find out if the plan will correct the 1099R already issued for the direct rollover into two forms, one for the allowed amount and another for the amount the plan wants returned. At the end of the day client would have to convince the IRA custodian to treat the amount returned as an excess regular IRA contribution and return it either with earnings or without depending on the year the rollover was received by the first IRA custodian.  Is the plan asking for both a return of cash severance in addition to the overpaid 401k contributions?  Note that the tax filing mess obviously involves the IRS and in some cases can cause participants more tax related headaches than for the actual loss of funds. 

Submitted by Mitch on Wed, 2018-10-31 14:54

Alan, as always, thank you for your thoughtful expertise.  A quick follow up….(1) the employer is not asking for severance back as they somehow corrected this issue before final payment.(2) The current IRA custodian (2nd after 2 transfers away from 401k) will code the withdrawal as “excess contribution.”(3) Regarding the corrected 1099-R’s from the 401k plan,… you say the plan would need to re-issue one in the allowed amount and a second for the amount they want returned.  This would account for the first “direct rollover” to the first IRA.  Would the 1st IRA custodian need to also re-issue the same set of “corrected 1099-R’s” to account for the “direct transfer” from IRA custodian one to IRA custodian 2?

Submitted by Alan - IRA critic on Thu, 2018-11-01 00:41

  • Employer is still asking for the 2903 back?  If the funds moved from 1st IRA custodian to the 2nd by direct transfer, there is no 1099R and no tax reporting.  As it stands now, the only 1099R form or forms would be issued by the 401k plan. The first IRA custodian would issue a 5498 reporting a rollover contribution, and the IRS should match up the 1099R to the 5498 amounts. If the client receives a 1099R from the 401k plan indicating a reduced amount eligible for rollover (coded G), then client would present a copy of IRA custodian 2, although you indicated that IRA custodian  2 has already agreed to process an excess contribution return.  The return of this excess IRA contribution with allocated earnings should only show the earnings amount as taxable. Such earnings would be reported as taxable in the year the excess IRA contribution was made to the first IRA. Although the amount of the excess contribution removed from the IRA is not taxable, if the 2903 is returned to the plan then the plan should rescind any 1099R showing the 2903 as taxable.  In other words, until the 401k settles on what 1099R forms will be re issued and how they will be coded, the client should not request any corrective distribution from the IRA.  The client should not be taxed on the 2903 if he returns it to the plan, and client should not request an IRA excess contribution to be withdrawn from the IRA unless the 401k plan 1099R forms indicate that the 2903 was not eligible for rollover. 
  • Was the 401k rollover distribution done in 2017 (in which case client has the initial and perhaps corrected 1099R forms) or was it done this year with no 1099R forms yet issued?
  • Another alternative for the plan is to only issue a 1099R for the allowed rollover amount, and hold off on the 2903 anticipating it will be returned to them. That would eliminate any tax due on the 2903.  So we are in limbo until the 401k plan decides what they are going to do to report the distribution.

  

Submitted by Mitch on Thu, 2018-11-01 17:14

Alan, your original comment proves to be true,….”Many such incidents of overpayment are written off after an initial request is not complied with.”  I spoke with the plan administrator and she explained that the man hours already spent plus the prospect of additional efforts involving the plan custodian to correct 1099s, etc. prove to be more costly than the dollars involved in the reclaim effort itself.  So the company has decided to write off the matter.  Alan, as always, I sincerely appreciate the support you provide to the community and the professionalism with which you approach your advice.  All the best!!!!

Add new comment

Log in or register to post comments