NUA and 1099-R distribution code E in box 7
Hello,
Has anyone ever run into this situation before?
Person is over age 60 and retires in 2020. The only desirable NUA trigger left is separation from service.
In 2020, there is an excess contribution to 401k which triggers a 1099R in 2021 due to excess contribution. Money returned to the person and 1099 R received in 2021 (for 2020 excess contribution) which coded as “Excess Contribution” code E in box 7.
Now when I attempt to do NUA in 2022, the custodian says that this issue may disallow the NUA transaction because the “separation of service” trigger was used up in 2021 due to this “excess contribution”. If we proceed, the whole NUA transaction including rollover to IRA/Roth IRA may be a taxable event.
Does anyone know whether the excess contribution does in fact count as separation of service trigger being used up? It seems like this shouldn’t be considered a regular distribution.
Is there any precedent for this that you know of?
Thanks in advance!
Permalink Submitted by Alan - IRA critic on Thu, 2022-10-27 21:59
Have not seen this question addressed in any form. While a non discretionary corrective distribution should not be treated as “intervening” with respect to a qualified LSD, who knows how the plan administrator or the IRS would view it. The problem is, by the time the participant receives a 1099R without the NUA being included, it probably is too late to complete a 60 day rollover of the employer shares to an IRA that would erase the taxable distribution. The plan administrator could be asked in advance how their 1099R would be issued, and if they indicate that the LSD will be intact with NUA being reported, the participant may take a chance that the IRS would not question the plan. However, if the participant chooses to be aggressive, it would still be advisable to wait and distribution the shares no earlier than mid December to produce enough time after the 1099R is issued to complete a 60 day rollover should the administrator’s back room decide to disqualify the NUA. As for the IRS itself overriding a 1099R that includes NUA, it is unlikely that they would do the research on triggering event dates or prior guidance on this issue. Perhaps, if the plan administrator has resources to research this in advance or knows how they would issue the 1099R, the participant could at least eliminate the plan itself as disqualifying the LSD.