Mistaken 401k rollover

Submitted by Darren Yoder on Fri, 2022-08-19 21:02

I’ve been a financial advisor for 20+ years and this is the first time I’ve ever had this happen to a client. I’m not sure who can provide the answer other than Ed Slott – so here I am…
My client wanted to rollover his 401k while still employed. He’s 60 years old and eligible for an in-service rollover for the Employee portion of his 401k. However, his Plan doesn’t allow for an in-service rollover for the Employer portion of his 401k until he is terminated/retired.
When my client filled out the form to request the in-service rollover for his Employee portion, the plan administrator mistakenly rolled over the Employer portion as well. At first, the client was happy to know he can get out of his crummy 401k and into an IRA. However, the client just received a letter from his plan administrator letting him know an error was made and the Employer portion is:
“ineligible for withdrawal and the overpayment may be subject to increased taxation and penalties if not returned. If the amount is not return, we will amend your Form 1099-R for your distribution to indicate this amount is not eligible for rollover and favorable tax treatment in the event of a penalty tax exemption.”

My thought, when the 1099-R comes to my client as a “taxable” event, can his accountant consider this a 60 day rollover since the money arrived into an IRA within the 60 day period?

My client doesn’t want to return the money to his administrator but also doesn’t want to pay extra taxes/penalties.

Please help! Thanks!



Submitted by Alan - IRA critic on Sat, 2022-08-20 00:36

  • Overpayments can be very ugly to deal with. Once it is clear that the plan sponsor is not willing to reimburse the plan, and requests the return of the disallowed distribution, it is safer to comply. Client could present the plan reimbursement demand which explains that the amount is not rollover eligible to their IRA custodian and ask that the amount be treated as an excess IRA contribution and returned with allocated gain or loss. The amount received might not match exactly with the plan demand, which should include plan interest as the plan calculates it, whereas your IRA would have a different investment result for roughly the same period. 
  • At least there was no withholding and apparently only 1 calendar year is involved here.
  • Expect the plan to issue one 1099R for the allowed direct rollover amount coded G, and if they receive the requested funds back before year end, there should be no need for another 1099R reporting a distribution. If client does not repay, expect another 1099R showing a taxable amount which could include a distribution code indicating the amount as not rollover eligible. The IRS would then disallow rollover reporting on client’s 1040. At least client is over 59.5, so there would be no penalty should client choose to roll the dice and not comply with the request. 
  • Plan distribution restrictions are abnormal. If they allow elective deferrals to be distributed, most plans would also allow vested matching or profit sharing contributions to also be distributed. 

Submitted by Darren Yoder on Fri, 2022-08-26 22:48

Per the IRS website, a 60 day rollover is eligible except for these reasons:

  1. Required minimum distributions,
  2. Loans treated as a distribution,
  3. Hardship distributions,
  4. Distributions of excess contributions and related earnings,
  5. A distribution that is one of a series of substantially equal payments,
  6. Withdrawals electing out of automatic contribution arrangements,  
  7. Distributions to pay for accident, health or life insurance,
  8. Dividends on employer securities, or
  9. S corporation allocations treated as deemed distributions.

Submitted by Alan - IRA critic on Sat, 2022-08-27 03:43

That list should include overpayments, and according to EPCRS the plan is supposed to notify the participant that the overpayment is not eligible for rollover. However, there is nothing in the 1099R Inst such as a special distribution code that also tells the IRS that the overpayment is not rollover eligible. That said, if the IRS ever finds out through a plan audit or other means, there is no SOL for excess IRA contributions. Since this plan provision that employer contributions are not eligible for rollover after 59.5 when other portions are is atypical, it seems that the plan might consider amending the plan provisions to allow this distribution.

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