I left an employer in mid-2011 and fully rolled-over my 401k plan into my IRA shortly after leaving. I had contributed the full amount to my 401k for the 2011 tax year. My former employer's plan failed the ADP test at the end of 2011 and so they ended up issuing me a 1099R for what they would have distributed to me, had I still been in the plan. Was the correct? Should I have been subject to distribution since I was no longer in the plan? Oddly enough, the 1099R issued implies they made an actual distribution to me (with taxes withheld) and that I should therefore pay taxes on the distribution, but such a distribution was never made since I was no longer in the plan and the administrator no longer had access to my funds. Does anyone know what the IRS says on this...are you subject to distribution if no longer in the plan at the time of the distribution of excess funds? Also, if I just pay the taxes, now I have funds in my IRA rollover account that will be taxed yet again when I withdraw them at some point int he future...how do I deal with that?
Thanks for any help! TCH
Hi Charles,
I would definitely speak to a tax professional on this (CPA or EA). You can also call the IRS, but if you do record date, time, person you spoke with, etc. and keep it with your tax records.
You contributed the maximum to a plan that failed its test, so you had excess contributions. The plan has to distribute excess contributions in the event of a failure. I am not a lawyer, and this isn't legal advice, but I believe you are still subject to the distribution even though you were no longer with the employer.
In general, excess contributions are not eligible as a rollover distribution. They did "distribute" the money, and it went from trustee to trustee, but it wasn't eligible as a pre-tax portion of your IRA. However, if you do pay taxes on the excess amount, the remainder may be eligible as a non-deductible contribution. If you file Form 8606 this should protect you from paying taxes on the post tax "contribution" a second time. This is something a tax professional can help you determine.
The other thing. You didn't mention was if the 1099 was for tax year 2011 or 2012. Generally excess contributions are taxable in the year of the excess contribution and allocable income/growth in the year of distribution. I assume the 1099R you received was for 2011 and it included distributions for both the excess and allocated growth/loss? If so you will want to see a tax professional as quickly as possible as the filing deadline is getting pretty close.
