Profit Sharing Rollover Mistake

Submitted by Matthew Oaks on Mon, 2023-08-07 16:01

Client has a profit sharing plan at work that is no longer funded. They are able to self direct it. After directing them as to how to get the funds moved, i.e. check made payable to custodian, don’t withhold taxes, etc., the client went back and requested the transfer from the employer.
Being a small company, the owners wife was in charge of these accounts. She processed the request into the clients paycheck.
When the client went back and asked why she said that is how they have to do it and they had to withhold state and Medicare tax but that was all.
So saying all that to ask, can we still get this funds moved to an IRA? We are within the 60 day window but I didn’t know if putting it into a paycheck is going to cause problems. Any help you can give is appreciated.



Submitted by Alan - IRA critic on Mon, 2023-08-07 17:10

  • This a rare and bizarre error on the part of the employer, and the tax withholding cannot be recovered until the 2023 return is filed. That means in order to complete the direct rollover as intended and requested, the client will have to return the net distributed plus make up all the improper withholdingamount from other funds and have the employer this time issue a correct direct rollover check.
  • The direct rollover will have to be reported on a 1099R, and the improper wages removed from payroll so that it does not appear on the year end W-2.
  • I have no idea how the Medicare tax can be recovered. Employer needs to consult a payroll accountant ASAP as client has a good case for legal recource from this employer.
  • If this cannot be resolved efficiently and timely, and a 60 day rollover becomes the last resort, in these circumstances of employer error, the 60 day deadline can be extended by the self certification method.

 



Submitted by Matthew Oaks on Mon, 2023-08-07 19:57

Thank you for that information. Fortunately, they didn’t not withhold much from the total so filling in the gap won’t be a big issue. My fear is that this amount will show up as w-2 income instead of them getting a 1099R. At least she is over 59.5 so no worries about a penalty. I have to reach out to her so she can get more info from the employer about the source of the funds. As the other commenter said, it might be a NQ source so no rollover allowed.



Submitted by David Mertz on Mon, 2023-08-07 17:46

Is this some sort of a nonqualified plan rather than a qualified PSP?  To be eligible for rollover the employer plan must be a qualified retirement plan.



Submitted by Matthew Oaks on Mon, 2023-08-07 19:54

I’m beginning to think this might be the case, but the employer told them they had to withhold Medicare and city tax.(I misspoke early and said state) If it was NQ i wouldnt think they would have to withhold any tax. I am going to reach out to the client again to try to get more information but she is not very fluent in account types unfortunately.



Submitted by Alan - IRA critic on Mon, 2023-08-07 20:41

Perhaps she can authorize you to talk directly with the employer. It does seem odd that the employer who should know the plan details by now would make this type of error, so it is likely that this is not a qualified plan in the first place. All the details should be clear before any remedial action is taken.



Submitted by David Mertz on Mon, 2023-08-07 23:45

It would be helpful to know the section of the tax code under which this employer plan was established and make your own determination from that as to whether the plan is qualified or nonqualified.



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