Excess Contribution Question
Hello, I have a client do a direct rollover into an IRA in 2016 from a pension plan with Boeing. My client was recently notified by Boeing that the plan made an overpayment when the funds rolled over and now the client has to return a portion of the funds. Since the overpayment was an error on the plans end would my client need to be concerned about the 6% excise tax for the 2 years that the overpayment was in the IRA.
Permalink Submitted by Alan - IRA critic on Thu, 2018-07-19 23:38
Did the plan explain the nature of the error? Would not return any funds unless there is no question that he owes it. The plan should also have explained if they are going to revise the 2016 1099R to reduce it to the amount eligible for rollover. If a revised form is issued, client will have to amend 2016. Once that is clarified, client will have an excess IRA contribution to be returned after the due date. A 2016 and 2017 5329 will have to be filed to pay the 6% excise tax. Client will also need to present a copy of the letter to the IRA custodian and request a distribution of the excess amount (no earnings come out because the correction is after the due date for 2016 excess contributions). When requesting removal of the excess client should explain (if there is no form provided by the custodian for this purpose) that the corrective distribution is done per Sec 408(d)(5) of the tax code. The IRA custodian will issue a 1099R form in January and box 2a should be blank, so he is not taxed on this distribution. Ideally, the pension plan will not issue a 1099R to report the distribution of the incorrect amount no longer included in the corrected 1099R direct rollover form, since they are asking for it back.