IRA BDA question

Submitted by Kevin O'Hearn on Tue, 2020-05-05 18:56

Hello, I have a client that has an IRA BDA that was rollover on 11/02/2018 from her husband’s 401 K with Fidelity. Fidelity reached out to my client and stated the funds should over never been rolled over to her. he client was the ex-wife listed as a bene on the 401k plan. Apparently her ex-husband, the plan participant, was supposed to do a bene update under some plan rules, but never did. Then he passed away. Fidelity contacted the client and released the funds as a rollover into an Inherited IRA. Then Fidelity came back and said the client should have never received the funds because her ex-husband, the plan participant, did not comply with the bene update requirement.

The client and Fidelity were going back and forth for several months; the client had to hire an attorney to represent her and so had legal fees. Finally the agreement was reached where the client was granted a discount for the legal fees she incurred; that is why the amount to return is less than the amount originally received into the IRA-BDA.

Any suggestions on how the funds should be returned? Death distribution and work with tax adviser? I guess this is why Ed always says to review your beneficiary all the time.

Thank you,

Kevin



Submitted by Alan - IRA critic on Tue, 2020-05-05 23:20

  • According to noted expert Natalie Choate, this fact pattern has brutal consequences that involve not only returning the funds, but also paying taxes and penalties in the process. It very much sounds like ex husband had remarried at the time of his death, resulting in his current spouse becoming the automatic beneficiary unless she signed a waiver.
  • What is Fidelity going to do regarding a 1099R?  Are they going to correct a 1099R they already issued reporting a taxable distribution since the death benefit was not eligible for rollover?  That would produce taxable income on the full rollover amount, and an excess regular contribution to the BDA, which would be subject to the 6% excise tax for each year the amount was not distributed as a corrective distribution.
  • If the original distribution is large enough that could trigger additional penalty for substantial underpayment of taxes.
  • See p 73 and 74 of Natalie Choate’s thoughts on this issue in link below, even though the situation is a little different than client’s. There is enough similarities to provide a good idea of just how costly this is. Note that in her example, the taxpayer did not even make a mistake, it was all a company error.
  • http://jointtaxandestate.com/wp-content/uploads/2018/12/IRAMistakes2018-2.pdf

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