1099R Coding of a Bene 457 distribution
Hi,
My wife is under 59 years of age. She is the benficiary owner of a NY State 457 plan, from her deceased parent (died in 2007 at approx 67). She is therefore required to take a mandatory distribution yearly. So far she has taken three RMD’s. 2008, 2010, and 2011. (none in 2009; suspended). For 2011, we just noticed that the 1099r distribution code in Box 7 is coded “2”, which reads…….”Early distribution, exceptions apply (under age 59 1/2).
Upon calling NY state 457 plan, we see that in 2008, the distribution was coded as “4” “death”. We think that is the correct code. In the last two years, it has been coded “2”, as mentioned. We beleive the “2” coding is incorrect, and that they should issue a revised 1099r with the proper “4”coding as death. We think that eventually the IRS will state we owe them a 10% penalty for because of this coding as ‘early’ distributions’.
NYS 457 plan reps from Nationwide (administered by Nationwide– with BNY Mellon as the bank paying agent) are not changing the code after 5 verbal requests since February 2011. Before we go the route of documenting this in a written letter, we would like to know the answers to these questions.
Are we correct about possible penalties? And are we correct that they are responsible to reissue a 1099r for prior years with the proper coding?
Thanks,
Michael
Permalink Submitted by Alan Spross on Fri, 2012-03-30 20:18
You are correct. All beneficiary distributions should be coded as “4”. But a code 2 also means that there is no penalty, so getting revisions done for prior years is probably not worth the effort. I doubt that you will ever hear from the IRS. Filing Form 5329 is not useful either because this form is only used to pay the penalty or to change FROM the early code 1 to the correct exception. Since 2 is itself an exception, there is no reason for the IRS to inquire since they do not care which exception applies. By the way, is the account properly titled in beneficiary format?
Since this is a 457b plan, all non death distributions are coded 2 because a 457b is not a qualified plan and does not have early distribution penalties. They might be just continuing to use that code for death distributions out of force of habit, but this plan is large enough to know better.
Permalink Submitted by Anonymous (not verified) on Fri, 2012-03-30 21:57
Thanks for the reply Alan.
In answer to your question: No, the account is not properly titled (as I know it) in the beneficiary format. Funny that you ask this. I always thought this to be strange (or wrong), however they havepreviously told me that is the way they do it. From appearance of account statements, you would never know it was a Bene account. I always had thought a bene retirement account needed the Bene name, and the original owner name stated.
Do I need to push this issue with them to get the account title to read similar to “Daughter Doe, Beneficairy of 457 Plan for Mom Doe”? If so what might I cite as the rule/law that would get them to act?
thx again
Permalink Submitted by Alan Spross on Fri, 2012-03-30 23:11
I think that non IRA plans have plenty of latitude in titling these accounts that IRA custodians do not have. RMD administration is pretty much left to the plans, and there is no 5498 filing or requirement to post a year end balance for RMD purposes as there is for IRAs. An account like this might be able to have separate beneficiary accounts set up only as back room accounting statementsto keep track of how much has been distributed to each beneficiary. That in turn, might explain how a 1099R might come out looking the same for a beneficiary as it would for the plan owner, ie the Code 2 in Box 7.
But I encourage you to at least get some answers about the account registration. If they can convince you that the titling and 1099R coding is done the same for all beneficiary situations, then you can be fairly sure that is will not lead to problems for your wife’s distributions. You might also note whether the 1099R identifies the plan as a 457b and if so, the IRS may know that early withdrawal penalties generally do not come into play. I say “generally” because if the 457b accepted an IRA rollover, the IRA money does NOT get the 457b penalty exception and they should code those distributions with a 1 if prior to 59.5.
Permalink Submitted by Anonymous (not verified) on Sat, 2012-03-31 03:23
Really Good Info. Thanks a Ton. I appreciate it.