Overpayment from Pension and 72(t) problem
In 2007 the client rolled over his pension (lump sum) to a IRA and began taking 72(t) distributions. In July 2010 of this year Fidelity contacted him that they calculated the lumpsum amount incorrectly and gave him an overpayment of $69,000 – of which they would like him to return as soon as possible. A couple of issue now arise. Since the payment is to be made back to the Pension, the distribution would be considered taxable as I unaware of a way to “roll” back to a pension. Is there a way to offset this on his taxes as he would be returning the amount to Fidelity/Pension. They reference publication 525 and indicate a credit or itemized deduction, but I can not find the exact paragraph. And of course there is the 72(t). I believe the distribution would be considered a modification of payment, and the $100k of distributions taken to date would be subject to the 10% penalty. Is there any exception to this required return of assets. Note: Client does not have other non-qualifed or qualified assets to use to pay back the overpayment.
Permalink Submitted by Alan Spross on Wed, 2010-08-04 22:54
Fidelity does not seem to convey much responsiblity for creating this problem in the first place. Do they understand they are creating a hassle for the client to convince the IRS that his 72t plan should not be considered modified?
FIrst off, Fidelity should cooperate with the client to accept an IRA to QRP rollover from the IRA. This is not a taxable event and would be reported on a 1099R as a direct rollover. This is simply a reversal of 69,000 of the original direct rollover back to Fidelity. No tax or penalty for this.
However, a transfer from a 72t IRA plan to another type of retirement plan is considered a modification of the plan if done voluntarily by the client. In this case though, the rollover is a required correction of an administrative error committed solely by Fidelity or whover calculated the lump sum. Once the IRS is convinced of this, they should allow the 72t plan to continue due to correction of an executary error not caused by the client. That would allow the client to complete the 72t plan, but of course the loss of 69k has further depleted the account. I assume client is NOT on a recalculation or MD method calculation and therefore his annual distribution would remain. It would probably take additional work to convince the IRS to allow his to reduce his annual distribution to the amount that would have applied if the 69k had not been rolled in the first place. Client should demand a complete letter of explanation from Fidelity how the error occurred and clarifying the the client was in no way responsible for the error. The downside here is that the client will probably need professional representation to effectively communicate his position to the IRS and that could be expensive. A letter ruling migh even be required.
Client should press Fidelity to pay for the letter ruling request if it becomes necessary.
Further, with respect to the lump sum, has all due diligence been applied in requiring a complete documentation from Fidelity outlining their position about the new calculation? Why should client believe that the new calculation is any more acccurate than the first one. We are in a rollout period where lump sum calculations are being radially changed, and Fidelity obviously is now using a higher interest rate as called for in the PPA. My impression is that the phasein of the new PPA requirements just started in 2007. Therefore, rather than rushing that 69k back to Fidelity, the first item to contend with is requiring Fidelity to prove that their new calculation is correct.