401(k) rollover

Submitted by Michael Porfido on Mon, 2021-07-26 20:20

Did a rollover with a client in May, 2020 from his 401(k). We rolled over his pre-tax cash and stock in-kind and utilized the NUA strategy for some of his stock. We requested and the Fidelity rep on the phone confirmed it was a full distribution of everything from the plan.
My client just send me a screenshot showing about $24K left in the plan, unbeknownst to me. We did a call with Fidelity and the rep said it was from dividends paid on the stock that were reinvested into stock after the rollover call in May. I am thinking Fidelity should have sent this stock out to the IRA.
I am wondering if this is going to cause any issues because of this stock still in the plan this year?



Submitted by Alan - IRA critic on Mon, 2021-07-26 21:32

This could be a problem. The distributions were done in plenty of time for any trailing dividends to be distributed from the plan to attain the 0 year end balance required. Normally, after a direct rollover of the entire balance any trailing dividends and assets purchased would be automatically rolled into the same IRA as the prior direct rollover, and that apparently was not done. Is the “total distribution” box checked on both 1099R forms received last January for this plan? 

Submitted by [email protected] on Mon, 2021-07-26 23:47

Yes, the total distribution box is checked on both 1099R’s. I rememeber specifically confirming and he even stated on the phone that this was a total distribution. I am having the client scan them to me for the file. 

Submitted by Alan - IRA critic on Tue, 2021-07-27 00:09

The IRS is not likely to question the 1099R as issued, but there is an outside chance that if they were to audit the plan there would still be a problem. Is this plan being administered by a major record keeper?  I understand that any questions about the 1099R directed to the administrator could result in a corrected 1099R being issued that would eliminate NUA and result in a fully taxable distribution, unless RR 2020-46 could be used to complete a late rollover of the shares to an IRA.

Submitted by [email protected] on Tue, 2021-07-27 17:07

Fidelity is the administrator and this is the Chevron Corporation 401(k) plan

Submitted by Alan - IRA critic on Tue, 2021-07-27 19:52

Large and professional firms there. Makes it odd that the 1099R forms showed total distributions and that the trailing dividends (or their reinvestments) were not directly rolled out to the IRA upon receipt as a follow up direct rollover. Now there is an awkward situation where a question directed to Fidelity could trigger a corrected 1099R  that would erase the LSD. 
One possible explanation for the 1099R is that the LSD was coded as such when made and there was no remaining balance in the plan at the time, the trailing dividends being paid later on. The 1099R Inst make this a possibility, but they are not totally in sync with tax code Sec 402(e)(4) dealing with qualified LSDs for NUA purposes. This code section makes it clear that the year end balance of the plan (and similar plans) must actually be 0.

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