Correcting 401(K) distribution mistakes by beneficiary

Submitted by Avo Mavilian on Tue, 2020-08-04 16:39

I have a client who took a lump sum check less the 20% withholding from her mothers 401(k) after the mother’s passing based on the trustees advice. She would rather have had this become an inherited 401(k) rolled over to an inherited IRA. Anyone have experience with this type of situation and how to best rectify?



Submitted by Alan - IRA critic on Tue, 2020-08-04 17:01

How did this happen? Was client acting under a POA for her mother and had NOT reported her mother’s death to the custodian?  20% withholding would not have applied to anyone but mother since it only applies if the distribution is eligible for rollover, so this is another indication that the death had not been reported to the plan administrator. Who was the check issued to?  Also, what was the DOD of mother?



Submitted by Avo Mavilian on Tue, 2020-08-04 17:09

The check was issued to the daughter AFTER she notified and delivered the death certificate to the employer (plan sponsor).   So they cut a check made payable to the daughter (the beenficiary) to the name of the beneficiary and witheld 20%.   



Submitted by Alan - IRA critic on Tue, 2020-08-04 17:35

  • The withholding % is in error unless daughter requested 20% instead of the default 10%.  DId daughter submit a form or otherwise indicate the proper payee for a direct rollover check to an inherited IRA she had established?  It is not uncommon for a beneficiary to indicate they want a distribution instead of a direct rollover, and of course a distribution to a non spouse is never eligible for rollover.
  • If the plan had somehow fallen behind on mother’s RMDs, a distribution of that amount outside of a direct rollover is required. However, if mother passed in 2020,  there is no year of death RMD due. 
  • If there was anything daughter did that suggested a distribution was requested, there is no possibility of relief. If daughter has not cashed the check, and she has a decent case, she might have her attorney draft a letter with the returned check insisting that it be redosited into the inherited 401k. If there is a recording of this trustee’s “advice” it might help her case, but the withholding is already gone to the IRS so that presents a major complicating factor. She might offer to replace the withholding using other funds to add to the returned rollover check, and wait until she files to recover this money from the IRS. If she cashed the check, that’s another major hurdle. All the small details matter here, particularly any form she submitted or any recording of her conversations with the plan administrator.


Submitted by Avo Mavilian on Tue, 2020-08-04 17:40

Thank you!!! 



Submitted by David Mertz on Tue, 2020-08-04 19:59

Using other money to replace the amount withheld for taxes generally would not work in this case.  Even if the rest is able to be returned to the 401(k) account, the payer must still report the amount withheld for taxes on Form 1099-R as having been paid to the recipient and withheld for taxes, and it’s not possible to report this amount as having been rolled over since a distribution to a non-spouse beneficiary is not eligible for rollover.



Submitted by Alan - IRA critic on Tue, 2020-08-04 20:55

Good point, but at some level there must be some access by the plan to the IRS to claw back incorrect withholding. For example, if the plan made an error for which they were 100% responsible, the lump sum was 5mm and 1mm was withheld, and participant sued the plan for several resulting financial consequences, the plan must have some avenue to pursue with the IRS to rectify the error. 



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