IRA to 401(k) rollover issue
Client inadvertently made a rollover distribution from an IRA account to an employer-sponsored 401(k) plan that included previous nondeductible contributions for which he had tax basis. No amount was held back for the basis in the IRA – the full IRA account balance was transferred. Are there any means to correct this mistake to recover the tax basis or is the tax basis completely lost upon transfer?
Permalink Submitted by Alan - IRA critic on Fri, 2015-09-18 02:52
There may be an EPCRS approved method for the 401k plan to correct this error by returning the IRA basis to the client. EPCRS has recently relaxed some of the prior rules that may have resulted in serious consequences to the plan such as disqualification, and this situation may be included in that relief. The client’s ability to restore this basis in their IRA depends entirely on what action the plan takes to resolve this error including whether they will distribute the basis amount or not. As a side note, if the client has other TIRA accounts then there probably will not be a problem to begin with since basis floats over all the TIRA accounts and amounts rolled into a 401k are deemed first to be composed of the pre tax balance of all TIRAs.