After tax contributions rolled over from Company plan

Submitted by wes carr on Mon, 2010-03-29 18:41

A client of mine would like to roll over her assets from 2 different company plans to an IRA. She is under 59.5 and both plans have after tax contributions in the plan. When we called both providers they said they would cut a seperate check to my client for the aftertax contributions. The plan was to keep her after tax contributions out of the IRA (to herself) and not roll that part over and go forward with a direct rollover of the taxable portion to her IRA. Is this no longer possible due to Notice 2009-68? I did this with every client in years past without adverse tax consequence.



Submitted by Alan Spross on Mon, 2010-03-29 19:16

You can still do it, even though there is now a question about pro rate the basis that was brought up by the direct Roth conversion opportunity that began in 2008. SInce what you indicated has been common practice for many years, including the period of 2002 to the present when the after tax amounts COULD HAVE been rolled over, and the IRS has never questioned this practice or informed plan administrators that they need to change their 1099R procedures, your client can do the direct rollover of the pre tax funds and receive a check made out to her for the after tax funds.

Now, if she wanted to convert those after tax funds to a Roth IRA like many people now want to do, there could be a somewhat greater risk of an issue.

Submitted by wes carr on Mon, 2010-03-29 21:24

If I could expand on my comment…After reading Natalie Choate’s commentary it would seem the plan administrator is not responsible for reporting it any differently and it is up to the tax preparer to proportionately allocate the after tax amounts between the two pieces. Is this your understanding or do you think it is safe to take the after tax money directly to the client without any current tax ramifications or the need to allocate the after tax contributions between the two distributions.
Thanks.

Submitted by Alan Spross on Mon, 2010-03-29 23:24

I would agree that an error by the plan administrator would not exempt the taxpayer from any taxes due on plan distributions that are not rolled over or are rolled into a Roth IRA. But I would need to see her total article to determine the context in which she is making her point.

Unlike IRA distributions where the issuer is not responsible whatsoever in knowing the amount of basis included in a distribution, the Inst for form 1099R made it clear that the issuing plan administrator is responsible for entering the taxable amount in Box 2a of a plan distribution, and the Box 2b “taxable amount not determined” is only to be checked if for some reason the plan is unable to determine the taxable amount.

I cannot a situation where the IRS second guesses an employer or insuror (annuities) 1099R with respect to the taxable amount. If the IRS decides that the pro rate rules need to be applied to each distribution individually, it is very likely that their first instructions would be to the 1099R issuers. Note that taxpayer have proven terribly inefficient at managing IRA basis through Form 8606, and there would be havoc if the prior distributions and rollovers were changed with respect to the taxable amount.

That said, the IRS has surprised all of us before!

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