lum-sum pension repayment
I received a letter this week stating that I was overpaid by $20596 on my lump-sum payout due to a error in the pension benefit calculation. The payout was made in August of 2006. The error was caused when they counted 2 years of part-time work as full-time. The entire lump-sum payout was rolled into an Traditional IRA.
If I cannot get enough cash to pay and have to take it out of the IRA, how will the IRS see this, will this be taxable and in what year?
Permalink Submitted by Alan Spross on Wed, 2010-12-15 21:45
This situation is covered on p 50 of Pub 590, “Excess due to incorrect rollover information”.
First, I would demand a fully detailed written explanation and the corrected calculations of the correct LSD amount. The purposes for this are:
1) So you can have documentation that satisfies you that you really do owe them the money.
2) Also docuementation that you can show to the IRS to eliminate taxation of your distribution.
Since these are funds that you owe back to the plan, you do not owe taxes on them. But the 1099R from the IRA custodian will just show a typical distribution and not a return of excess contributions because this is being done after the extended due date for 2008. You will need the documentation to explain to the IRS why you are not reporting this distribution in your income in the year distributed.
Note that since this is an excess contribution, you cannot pay the plan back in other cash and leave this amount in your IRA, it must be distributed because it IS an excess contribution. So you will not owe any tax or penalty.
You also should amend your 2008 return to show the correct amount of the rollover (ie 20,596 less than what was originally rolled over). Again, no tax impact here, just a correction of your return to conform to the correct amounts. Supply an explanation on Form 1040 X for the reason for the amended return for 2008. There is NO earnings calculation computed on the excess IRA contribution, ie only the exact amount of 20, 596 is to be distributed to you and/or transferred back to the pension plan.
Permalink Submitted by John Bedwell on Fri, 2010-12-17 02:10
Thanks for the help, I have one other concern, below is the last paragraph of the letter I received
‘If you fail to return the overpayment amount the overpayment amount represents taxable income that is not eligible for rollover. This amount will be reflected on Form 1099-R which we will issue to you with a copy to the IRS. If you had directly rolled over the overpayment, your 2010 Form 1099-R will be revised to reflect the amount eligible for rollover. The remaining amount (i.e. overpayment) will be reflected on a Form 1099-R.’
Does it make any difference that the error was discovered in 2010, If I read your post correctly, this matter should be taken care of with an amended 2006 return.
Thanks again
Permalink Submitted by Alan Spross on Fri, 2010-12-17 02:37
Yes, that’s a legitimate concern.
I don’t know how they revise a 2006 1099R with a 2010 1099R, or can reduce a 2006 distribution by showing a 2010 distribution. Perhaps if you return the 20,596 to them, they will not even issue a 1099R since the direct rollover was not taxable in the first place, but I would wait to see what they send you before filing an amended return or your 2010 return. Then you will have to communicate the situation to the IRS. In other words, both you and the IRS will have to react to what they issue and for which year unless it makes no sense, in which case they would have to revise it again. There might be special rules for this since 2006 is now a closed tax year, but I have no idea how they should actually report this. Since it was their error, they need to provide you with the correct filing instructions.
You may need to post back after you get the 1099R and let us know what it says or what instructions they send you.