corrected Estate 1099R

Submitted by Philip Daniel on Fri, 2019-10-04 23:45

I am the executor and sole beneficiary of a 76 year old friend’s estate who died in 2016 that included an IRA. In November 2017, the plan administrator, TRowPrice, distributed a RMD to the estate. Also in November 2017, I contacted TRowPrice to have the IRA put into my name. They advised me that in order to do that the funds would have to be rolled over into an inherited IRA, which they did. The estate received two 2017 1099R forms from TRowPrice: one which reflected the 2017 RMD amount in Box 1 & 2a and and “4” in Box 7 and one reflecting the amount rolled over into the inherited IRA in Box 1 (00.0 in 2a) and “4G” in Box 7. In January 2019 realized I never got my 2018 RMD for the inherited IRA. I contacted TRowPrice to inquire as to why I had not received the RMD and they informed me that the proper paperwork was not completed for an automatic RMD. I completed the form for future automatic RMDs and withdrew the required 2018 RMD (based on my age, which now seems incorrect). I received a waiver from the IRS for the missed 2018 RMD in June 2019. In July, 2019 I received a letter from TRowPrice stating that the deceased did not designate a beneficiary on his account within the Plan. As a result, according to the Plan procedures, the beneficiary was defaulted to the estate and that an estate account is not eligible for rollover. The letter indicated that the only withdrawal option is a taxable distribution payable to the estate and, therefore, the 2017 tax reporting must be amended and that I would be receiving a corrected 2017 1099R to reflect the amount rolled over to the IRA as taxable income to the estate. I was also instructed that I should remove the amount plus earnings as an Excess Contribution Return. I received a corrected 2017 1099R with the combined total of the 2017 RMD and the rolled over amount in Box 1 & 2a and “4” in Box 7. Was it proper for TRowPrice to issue a corrected 2017 1099R as they did when it doesn’t reflect what actually happened? Additionally, if they admit that they made an error in setting up the inherited IRA, why is this the only remedy at this point in time? I would have left the funds where they were and taken RMD over as long a time as the law would have allowed. Also, if the only remedy at this time is for me to withdraw the amount from the inherited IRA, why wouldn’t that amount be reflected in a 2019 1099R instead of the corrected 2017 1099R? Finally, if I withdraw the rolled over amount plus earnings, how should the difference be treated; as a 2019 1099R tax distribution?



Submitted by Alan - IRA critic on Sat, 2019-10-05 00:20

  • So what the estate inherited was a qualified plan, NOT an IRA. I don’t how Price could have missed that and done a direct rollover to an inherited IRA, but they are correct that an estate beneficiary does not qualify for such a rollover. In this situation, while the IRS rules would allow RMDs over the decedent’s remaining life expectancy, very few plans will offer anything other than a lump sum distribution. That direct rollover was not allowed per IRS and plan rules, so the amended 1099R forms are correct, and the entire distribution was taxable in 2017. Further, since the funds went into an inherited IRA, the inherited IRA custodian must be requested to treat the rollover as an excess regular IRA contribution for 2017. They will probably transfer the inherited IRA balance into an IRA owned by you (not reported or taxable), which would then process a distribution of the rolled amount. There should be no double taxes so the distribution of the rollover out of the IRA (the entire inherited IRA balance must be distributed) should not be shown as taxable. The earnings can stay in the IRA since you owe the excise tax for 2017 and 2018. Get the rolled over amount distributed as a corrective distribution by year end and there will be no excise tax for 2019. 
  • NOTE: If you happen to be eligible for a TIRA contribution for 2017 that you did not make, please advise.
  • The rollover to the IRA created an excess contribution which was not corrected by the due date, and therefore you will owe a 6% excise tax for 2017 and 2018. This is Price’s fault and I would insist that they reimburse you for the excise tax, any interest billed for late payment of the excise taxes, and expenses related to amending your returns. 
  • You WILL get a 2019 IRA 1099R, but as explained above, the only taxable amount in Box 2a should be the excess you receive over the amount rolled into the inherited IRA. But you do not have to take the earnings out unless you want to.
  • Again, the Price administrative error does not change what would have happened anyway – except for the excise taxes, any interest, and filing expenses. They should make that good for you.
  • Yes, the worst thing someone can do is not name a beneficiary on a qualified plan. This is even worse than not naming one on an IRA, because it will almost always result in a lump sum distribution, a higher tax rate that year, and loss of any further tax deferral.

Submitted by Philip Daniel on Sat, 2019-10-05 14:41

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Thank you for your response.  Yes, I was eligible for a TIRA contribution for 2017 that I did not make.  I am not certain, but I believe that Price could be a plan that offers RMDs over the decedent’s remaining life expectancy.  This seems to be the case given the RMD made to the estate in November 2017 that was based on his age.  I don’t know if it is the same for the Plan, but I looked in their IRA paperwork and that is what they would do for an IRA without a designated beneficiary that went to the estate of the deceased.  If it is the case that I could have taken RMDs over the life expectancy of the deceased, does that change what can be done at this point in time (I certainly would have taken that option verses a lump sum distribution)?  Additionally, do you have any suggestions as to how to get Price to make good for the excise taxes, any interest, and filing expenses?  If Price refuses, do you know of any recourse I would have?  Do you think the IRS would waive the excise taxes given the circumstances or am I dreaming?

Submitted by Alan - IRA critic on Sat, 2019-10-05 16:10

  • If you were eligible for a TIRA contribution for 2017 that you did not make (and did not make a Roth contribution either), then 5500 of that contribution is not excess and would not have to be removed. You may or may not be able to deduct the 5500. Catchup contribution of another 1000 also applies if you were 50 or above in 2017. In addition, if you were also eligible for an IRA contribution that you did not make in 2018 or 2019, Form 5329 will apply more of the remaining excess to those years to further reduce the excess and the excise tax for 2018 and eliminate the need to withdraw as much of the remaining excess before year end 2019.
  • There is no published method to apply to the IRS to waive the excise taxes, and also no statute of limitations after which they could not levy such taxes and interest on late payment.
  • If Price is totally responsible for this error, you may be able to appeal to a senior level employee for payment of your damages. Pursuing litigation is probably not worth the legal costs you would incur and these firms have access to top legal counsel. In order to prevail you could not have been responsible for any part of the error, as contributing negligence on your part is what they will look for. Seems like a bonehead error on their part. They might have thought that the plan document included a default beneficiary other than the estate, which would normally be a surviving spouse or children of the participant if the estate was not the default beneficiary. They treated you like a default designated beneficiary which is not possible if you were only a friend of the decedent. Any idea of why they might have thought you were a designated beneficiary?
  • As for the actual distribution that was made, it is not eligible for rollover in any event, so your only recourse now is to pursue reimbursement of your added costs due to the lump sum distribution. What you would invest in this effort would be driven by the amount involved here. I would present your case in writing, and if the amount is substantial, maybe retain an attorney to send the letter. The amount of added taxes you are paying due to loss of the stretch (11.7 years) would have to be estimated and determination of those figures is highly subjective. You will also need to pencil out a Form 5329 for 2017 and 2018 to determine how much of the excess could be applied in those years to reduce the excise taxes before you present those costs to Price.
  • In summary, do not expect any help from the IRS on this. They can extend the 60 day rollover deadline, but the distribution must be rollover eligible in the first place. This one was not. Price would have to issue corrected 1099R forms as the basis for amended returns, or might opt to just pay your damages if they can be convinced that you have an airtight case.

Submitted by Philip Daniel on Sat, 2019-10-05 19:36

Again, thank you for your response; both have been very helpful. Yes, I was over 50 in 2017 and also eligible in 2018 and did not make a contribution in 2018 or 2019, so that will releave so of the pain a little.  A point of clarity.  Price as not said (I have yet to speak to anyone who seems to understand this situation fully) they will be rolling over any amount into an IRA owned by me, only that I should remove the rollover amount, plus earnings, as an Excess Contribution Return.   Do I have the option (right) to have them rollover the inherited IRA into a IRA owned by me and not remove the earnings as you indicated in your first response?  If Price will not roll the inherited IRA over, do I have the option of only removing the rollover amount less the contribution for 2017, 2018 and 2019 and rolling over the remaining contribution amounts plus the earning into an IRA that I own ?Also, for the amedend 2017 Estate 1041, am I clear that the rollover amount is understood as being dispersed to me as the beneficiary because it was rolled over into the inherited IRA with me as the beneficiary?  The rollover amount would then be reflected on the amended Schedule K-1?  Thank you for your generous assistance.

Submitted by Alan - IRA critic on Sun, 2019-10-06 00:43

  • While Price intially did a direct rollover to an inherited IRA for you (the critical error), because the plan was not eligible to be rolled over per IRS code, what you really ended up with was a regular IRA excess contribution to an owned IRA, despite the titling not conforming to that. As such, the excess IRA contribution can be offset by amounts you would have been eligible to contribute for 2017 and 2018. Because the extended due date for removal of an excess IRA contribution for 2017 was 10/15/2018, you must now follow the instructions for correcting an excess contribution AFTER the extended due date. Since that due date has passed, you incur a 6% excise tax for 2017 on the amount of the excess reduced by your allowed TIRA contribution of 6500 for age 50+.  Sounds like you could also apply another 6500 of the excess for 2018. I don’t know what amount was rolled into the inherited IRA, so cannot tell you how much can be applied to 2019 or must be withdrawn. Earnings are NOT removed for corrections after the due date. Removal of earnings and the excise tax are mutually exclusive.
  • Is Price as the plan administrator coordinating responses to this mess with Price as the IRA custodian?  That certainly would help, because explaining this mess to the IRA custodian from the start would be very difficult. They would not understand the situation or how to correct it.
  • What is the status of the estate?  Still open?  A 1041 will have to be amended for 2017 to report the distribution shown on the 1099R. The taxable income would then be passed through to the estate beneficiaries on a K 1, so you would then have to amend your 1040. You will probably need a CPA to handle the 1041. Not sure, but think the 1041 could still show the distribution passed through in 2017 even though you never handled it directly as executor.  My guess is that you are treated as having received the plan distribution in 2017 (conforms with the Price revised 1099R), and also having passed it through to yourself (any other beneficiaries??) in 2017. As an individual, you are treated has having funded an inherited IRA which is not an eligible transfer, therefore the inherited IRA deposit must be treated as an owned IRA by you. As such, unless you were 70.5, you have no inherited IRA RMD since you would be treated as the owner. Try that logic on Price to see if they concur and will transfer the IRA to an owned IRA. Perhaps they have another solution. The IRS is pretty passive on such matters, and will generally follow the 1099R and 5498 forms issued by the custodian, so the custodian is essentially in control.
  • NOTE:  As executor you cannot assign cash paid to the estate to an inherited IRA. You can only do that if the estate inherited an IRA in the first place, which is not the case.
  • You might want to see if Price has a better idea, but since there is no template to correct this type of mess and they are apparently responsible for creating it, maybe in their role as inherited IRA custodian they can recommend a solution conforming to additional 1099R forms they will issue for the IRA. They have already committed themselves for the qualified plan distribution by the revised 1099R forms they issued, and those are technically correct despite their failure to correctly issue these in the first place.

Submitted by Philip Daniel on Mon, 2019-10-14 18:21

Thank you again for your response.

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Yes, Price is the plan administrator coordinating responses to this mess with Price as the IRA custodian.  You indicated that because the extended due date for removal of an excess IRA contribution for 2017 was 10/15/2018, I must now follow the instructions for correcting an excess contribution AFTER the extended due date and since that due date has passed, I would incur a 6% excise tax for 2017 on the amount of the excess reduced by your allowed TIRA contribution of 6500 for age 50+, is the extended due date for removal of an excess for 2018 10/15/19, tomorrow or am I stuck for the 6% for 2018?

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