Code E (Box 7 Form 1099R) - Distributions Under Employee Plans Compliance Resolution System | Ed Slott and Company, LLC

Code E (Box 7 Form 1099R) - Distributions Under Employee Plans Compliance Resolution System

My advisory client (age 54) did a direct rollover of $13,000 from an old 401K to his IRA in August 2019.
In January 2020, client received a letter from his old company that $4,000 of this amount failed the non-discrimination testing and must be returned to him.
The full $13,000 was invested in his IRA account back in August 2019 and still remains invested there.
The client received two Form 1099R's: One for $9,000 showing Code G (Direct Rollover), and a second one for $4,000 showing Code E (Distributions Under Employee Plans Compliance Resolution System).
Are there any tax savvy tips to handle this uncharacteristic distribution?
I'm afraid if we do a distribution now from his IRA for the $4,000- that the new custodian will issue a Form 1099R with a Code 1 (Early Distribution) for 2020 and then he'll be taxed twice on the $4,000 plus a 10% penalty in 2020.
Any ideas?

  • The client must advise the IRA custodian that 4000 was not eligible for rollover and must be treated as an excess regular IRA contribution. The IRA Custodian will then calculate the earnings allocated to the 4000 and distribute the 4000 plus the earnings to the client. As such, only the earnings will be taxable and subject to penalty, but this tax and penalty must be reported on client's 2019 return because the excess IRA contribution was made in 2019. There is no double tax, as long as the IRA custodian understands this is the removal of an excess contribution.
  • The only tax on the 4000 is from the 1099R coded E and there is no penalty on this. The earnings will be taxed and subject to penalty. For the return of the IRA contribution, the 1099R will be issued next January with code P1. P means taxable in 2019, not 2020.

Perfect!  Thank you for taking the time to review my client situation and share your professional opinion.


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