401k Inservice Rollover (mega back door) problem

Submitted by Steven Vitullo on Tue, 2023-04-25 02:44

A little over a month ago I did an in-service direct rollover from my 401K to a ROTH IRA at the same institution as the 401K. This rollover included ROTH funds and after tax funds that were previously converted by 401K RIPC. The direct rollover went through fine; however, on the same day as the rollover an after-tax contribution came into the account (which neither I nor the agent could see at the time of the rollover) and part of that contribution was withdrawn and sent to me as a check made out to me. Which I never requested. I noticed this in my account two days after the rollover request and immediately called it in to the plan administrative institution (I received the check a week later with a statement that indicated the direct rollover part plus the amount of the check and the check part is listed as a “return of after tax contribution”).

Once I contacted the institution and reported the error they did a review of the recorded call to see if the agent made a mistake and concluded they didn’t after and that this was a timing issue and this is what is suppose to happen. This took 2.5 weeks. They then proceeded to contact my employer to get permission to do a correction and my employer did not respond for 2.5 weeks and only did because I reported this to my HR rep who contacted the retirement department. My employer’s response to the plan admin has been another question asking the plan admin if they could put the money back into my 401K. The administrator has communicated to my employer that they could do a correction to put the money back in my 401K, and we are now waiting on my employer again to give permission to do this.

So I am sitting here at at about 35 days since the check was cut. I think I have 60 days to get this fixed or it is considered an early withdrawal and have to pay a 10% penalty but no tax since it is after tax money.

The other option I am considering is doing a “60 day rollover” by taking the check to the administrators local office branch 30 minutes away and having them deposit into my ROTH IRA to complete a “60 day rollover”. I don’t really want to do this as it is not convenient, I don’t want to use my one in 12 month “60 day roller” in case I need it to correct something else in the next 12 months, and shouldn’t this be a correction since I never requested a check get mailed to me?

I am wondering what other options I have, if any since my employer is dragging their feet and the process to correct is going pretty slow? I have been told not to cash the check.

Thanks.



Submitted by William Tuttle on Tue, 2023-04-25 04:08

  • Only like IRA -> like IRA indirect rollovers are subject to the rule.
  • Indirect rollovers with a non-IRA employer plan on either end are not subject to the rule.
  • To be safe I would just get a 60-day rollover done promptly.

Submitted by David Mertz on Tue, 2023-04-25 11:34

  • You mentioned the concern about the unexpected check being a distribution that could be subject to an early-distribution penalty, implying that you are under age 59½.  If you are under age 59½, how is it that you could make an in-service distribution of funds attributable to elective Roth contributions, which seems to be what you have said?
  • What is the nature of the unanticipated after-tax contribution?  Are you having Roth contributions or traditional after-tax contributions made from your pay on a regular basis?
  • Why is the distribution identified as a “return of after-tax contribution” rather than as a regular distribution, why was only part of the unanticipated contribution distributed and what code would the plan be using to report this distribution if the distribution is not simply undone through bookkeeping corrections?  Was this a distribution due to failure of ACP or ADP testing?  An actual return of contribution reported with code 8 or code E due to the contribution somehow being an excess contribution would not be eligible for rollover.

Submitted by Steven Vitullo on Tue, 2023-04-25 19:02

Point 1) The part that was the check mailed to me was an after-tax contribution not roth.Point 2) I can do both roth contribution and after tax contributions once I hit the limit on roth contributions.Point 3) The code on the distribution for the check that was mailed to me was 1 – Early distribution, no known exception (in most cases, under age 59½). The part that was directly rolled over is COde H but that part is no problem its the part that they sent me the check that is the issue. 

Submitted by David Mertz on Tue, 2023-04-25 19:36

I agree with spiritrider, just cash the check and use the funds to complete a rollover to the Roth IRA.  Getting the plan and employer involved only complicates things.  Since the distribution was of after-tax funds, the code-1 Form 1099-R should show $0 in box 2a and an amount in box 5 equal to the amount in box 1, making the rollover nontaxable.  (Even if not rolled over, the early-distribution penalty would be $0 because this penalty only applies to the taxable amount.)

Submitted by Steven Vitullo on Tue, 2023-04-25 20:31

Yes it seem like the rollover may be the better option and the one I should have done in the first place.So if I take the check and have it deposited into my ROTH IRA as a indirect rollover since it came from a 401K, the once rollover per 12 month rule would not apply? Does that once in 12 month rule only apply to indirect rollovers from Traditional IRAs to Traditional IRAs?So what tax documents should I expect for this?  Sounds like a 1099-R code 1 showing $0 in box 2a and an amount in box 5 equal to the amount in box 1, making the rollover nontaxable.Would there also be a form 5498 showing the money going into the ROTH IRA as a rollover contribution?  If so does form 5498 show the total of all rollovers direct and indirect that went into that account for the entire year or is there a seperate 5498 form for each rollover done throughout the year? 

Submitted by David Mertz on Tue, 2023-04-25 20:38

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