corrective distribution
A termninated individual age 45 rolls over their 401(K) into an IRA. A year later, the individual receives notification from the former plan sponsor that the plan failed ADP testing in ’05, ’06, ’07, & ’08 and must request a taxable distribution from their IRA in the amount of $8,500 immediately. The IRA custodian cannot report this as a corrective distribution and the client is concerned the IRS will want to collect the 10% pre-age 59 1/2 distribution penalty. Does anyone know how to handle this?
Permalink Submitted by Alan Spross on Tue, 2012-08-28 19:29
Participant will probably recieve a revised 1099R for the year of the rollover showing 8,500 less and an additional 1099R for 8,500 coded as excess contributions and earnings. This amount will be taxable in the year of the rollover, but not subject to penalty. An amended return will be needed for the year of the rollover.
With respect to the IRA that received the excess contribution, this is addressed in Pub 590 on p 48, “Excess due to incorrect rollover information”. If the participant qualified for a regular IRA contribution that was not made in that year, the amount distributed from the IRA can be reduced accordingly. Provide the IRA custodian with supporting information (the letter) and include an explanatory statement for line 15 of the tax return explaining that the IRA distribution was due to incorrect rollover information due to ADP failure. The 8,500 (or reduced amount) will not be taxable or subject to the 10% penalty because it will not be taxable.