correcting erroneous rollover from qualified plan
Client received a direct rollover of his entire interest from his qualified plan to an IRA consisting entirely of cash. I subsequently discovered that part of his interest in the qualified plan was in the form of an annuity (which was not placed in the IRA). He is now receiving payments from both the IRA rollover and the annuity. We need to return to the plan the portion of the rollover that represents the value of his interest in the annuity (plus interest). Do we have an issue with taxes/penalties for excess contributions to the IRA? How would the return of the assets (plus interest) be reported on form 1099-R, as a corrective distribution?
Permalink Submitted by Alan - IRA critic on Thu, 2013-11-14 23:29
Was this a defined benefit plan? Sometimes a DB plan will purchase an insurance company annuity with part of the accrued value of the plan at some point in time and the rest of the plan can be converted to a lump sum distribution while the annuity cannot. Did the plan administrator make this error by failing to exclude the annuity from the lump sum and now wants the value of that portion of the rollover returned? If so, evidence of the plan error should be provided to the IRA custodian and the value that needs to be returned is distributed from the IRA and should not be taxed. Once returned to the plan administrator, the 1099R that reported the original distribution needs to be corrected to show the correct distribution and if this was in a prior year, the tax return must be amended. An explanatory statement needs to be prepared for the IRS to avoid tax on the IRA distribution for the returned contribution. Client should be sure to request a detailed letter from the plan explaining what happened and can then provide copies of it to the IRS with the explanatory statement. It’s all a reporting hassle to deal with.
Permalink Submitted by Joseph Wild on Fri, 2013-11-15 15:13
Thanks Alan. This is a defined contribution plan. ” Did the plan administrator make this error by failing to exclude the annuity from the lump sum and now wants the value of that portion of the rollover returned?” – Yes, that is exactly what happened. It looks like the annuity may have also beed transferred to the IRA, I am still trying to confirm this. This has all occured in 2013 so we are trying to get it resolved before year-end.
Permalink Submitted by Joseph Wild on Mon, 2013-11-18 21:25
It appears the annuity policy was not transferred to the rollover IRA, but instead the individual was made the new owner of the policy. What are the implications?
Permalink Submitted by Alan - IRA critic on Mon, 2013-11-18 22:30
Is the annuity in annuitized form? And the plan is no longer requesting a return, or was the rollover still incorrectly calculated?
Permalink Submitted by Joseph Wild on Tue, 2013-11-19 14:06
Yes, the policy has been annuitized. Participants’ total interest in the plan was $850,000, including the annuity valued at $230,000. Investment manager transferred $850,000 cash to the IRA, plus changed the ownership of the annuity to the participant. So the plan need to receive back $230,000 in cash plus earnings.
Permalink Submitted by Martin Helmer on Tue, 2013-11-19 16:19
more fully in making this right? Is the plan participant/client willing and able to assert he’s already received his full benefit and let the plan negotiate cashing in on the annuity to get its funds? Has the plan affected its qualified status by not following its own document and/or violated some operational rule, e.g. the joint and survivor consents to waive the annuity and receive the lump sum (see IRC sections 417 and 411)? If the latter is true, can this be corrected by the plan using Revenue Procedure 2013-12, possibly as simply as currently obtaining a participant and spousal waiver of the annuity?