401k distribution without notice

Submitted by Kevin Dempsey on Mon, 2019-04-22 20:46

Client had 401(k) with Morgan Stanley and was required to roll out or redeem by April 1 of year following age 70 1/2. She turned 70 1/2 in 2018. Client was told she had until 4/1, but on 3/26 MS transferred, in-kind, 1319 shares of MS stock from 401k to Non-IRA Brokerage account and redeemed the remaining balance of $53,000 in Cash and Mutual Funds withholding $21,000 Federal 20%. Mailed her check for $32,273. She wanted to rollover the entire $108,000 that was in the 401k prior to the distribution. What should she do?



Submitted by Alan - IRA critic on Mon, 2019-04-22 23:42

  • While this reflects an oddly restrictive provision within the 401k plan, it was a mistake for the client to ignore notices of the deadline for action. Client will now have to determine what the RMD amounts were for 2018 and 2019 as these RMDs were included in the distribution made. Client can select in any combination between the cash received and the shares what the RMD will be composed of and what to roll over to an IRA. To avoid tax on the remainder of the distribution including the withholding itself, client will need to complete a 60 day rollover of this remainder to an IRA.
  • For the distributed shares, the client can either roll the shares into the IRA or sell the shares and roll the proceeds of the sale into the IRA. Client cannot keep the shares and roll over other cash to the IRA. The amount withheld must also be replaced by other cash to complete the rollover and hold the taxable amount to the RMDs for 2018 and 2019. If client sells the shares and rolls over the proceeds, no gain or loss is recognized on the sale. Due to the combination of issues here, the client now has a much more complicted situation to deal with a new time limit of 60 days from the date of receipt of the distribution from the plan. They probably will need some help in dealing with this.

Submitted by Brendon Moore on Tue, 2019-04-23 18:49

The shares distributed, assuming there were no disqualifying events, would be eligible for NUA treatment and therefore, the market value of the shares could count towards the combined RMD.  You would want to see what they report as the taxable basis for all of the shares to see if that makes sense to do.  Depending on the recordkeeper, you can have them reprocess the non stock portion as a direct rollover, assuming they are willing to do that.  

Submitted by Alan - IRA critic on Tue, 2019-04-23 19:19

The client should have received a 402(f) Notice at least 30 days prior to this distribution. That notice outlines all the options including NUA. Client should request a quote on the cost basis per share to determine if NUA is viable for part or all of the shares distributed, but lacking an error that would justify an extension of the 60 day rollover deadline, there is only a month left to secure the needed info to determine if NUA is viable or possible, and roll over the portions of the distribution determined best.

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