Bank Error

Submitted by Denise Sowell on Fri, 2022-10-28 12:21

We completed a direct rollover of a 401(k) for a client to a newly opened IRA. Subsequently she received a small check from her 401(k) made to the new custodian of her IRA fbo the client. However, it was so small she made a mistake and decided just to deposit in her personal checking account. When she told me of the error, I asked her to call the bank and see how they would correct the error. The bank said they could not do anything. Is his true?



Submitted by David Mertz on Fri, 2022-10-28 13:00

  • Unless the check was made out to Custodian FBO Client *IRA*, there was no bank error.  A check made out simply to Custodian FBO Client can be deposited into any of the client’s accounts, including the client’s checking account, and it’s up to the client to make sure that it ends up where it should.
  • By depositing the check into the client’s checking account, this portion of the distribution from the 401(k) ceases to be a direct rollover.  As long as it’s done within 60 days of receipt of the distribution, the client can complete an indirect rollover of this portion by writing a check and having the custodian deposit it into the IRA as a rollover, not a regular contribution.  Although the Form 1099-R from the 401(k) will show the combined amount as a direct rollover (code G), there will be no need to obtain any correction of that form as long as the entire gross amount has been rolled over. 
  • If it’s been more than 60 days since receipt of this portion of the distribution, it’s too late to complete an indirect rollover.  This portion will then need to be reported as a distribution that was not rolled over.  Because the 401(k) plan itself did nothing wrong, it’s likely that that the plan will report the entire amount as a direct rollover and will refuse to issue Forms 1099-R reflecting what actually happened, so it will likely be necessary for the client to submit substitute Forms 1099-R (Forms 4852) with their tax return to reflect that.

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