excess 401k plan distributions to participants

Submitted by George W Smith IV on Thu, 2021-09-30 14:47

I have a client who was laid off. He took a full rollover distribution from his former employer’s 401k directly into his IRA.
The former employer just informed him his distribution was incorrect and overpaid by $965.00.
Former employer is asking for repayment which it appears my client does not have to do. But I’m not sure.
Here are my questions:

1. Does he have to repay the overpaid amount to the 401k plan?
2 If he does repay does he get a miscellaneous itemized deduction for the repayment?
3. If he refuses to repay what are the ramifications to my client?

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Permalink Submitted by Alan - IRA critic on Thu, 2021-09-30 19:12

Many plans will not pursue to collection if the error was a modest amount and their fault. But there is no guarantee and if they pursued collection, they would probably win. Since the amount in question is under 3000, there is no misc. deduction allowed if client repaid.
No telling what the plan will do with respect to 1099R forms. They might reduce the direct rollover 1099R to the allowed amount and then issue a separate 1099R for the overpayment amount with a code disallowing rollover. Client would then also have an excess IRA contribution to correct.