401(k)

[DTS]

Client invested in a 401(k) at work. The next year, this company told him he was under age and could not participate in the plan until he became 21.

This year, he received a check for his investment, employer contributions and earnings totaling $2,249.

Since this was not a valid 401(k) for him, will the 1099-R he receives be subject to the 10% early w/d penalty? Seems to me that he would not be.

Thank you,
Dennis

[veritas]

I would

think this would be handled the same as when someone over contributes causing the top heavy rules to apply. The money is refunded and is taxable in the year the excess contributions were made with no penalty.

[Snaggletooth]

Watch the Code

Dennis watch the code if and when the 1099-R comes out. This might be one of those freaky situations where code "P" is used (Prior Year), resulting in an amended return for a prior year.

If there were earnings, I would suspect he would have to be taxed on them, but I don't know which year would be appropriate...

[DTS]

Veritas and Snags

Thank you. I will keep my eye on that. I did forget about code P. He should be receiving shortly.

Dennis

[Ken]

401k

He would surly have to report the employers part of the contributions.

[DTS]

Ken

I would think he would have to report the employer's contributions, also. I did include them in the figure above.

Thanks,
Dennis

[RJM]

I think the company is at fault, subject to EPCRS

The company should never have permitted an underage participant, and if they took his money and deposited into a 401(k) account, they made an error. Their error in this case should only be corrected with, at minimum, the "self-correction" rules of the EPCRS set of Retirement Plan Violation rules. There is no way there should be any penalty imposed, and in fact the company should have communicated the problems to the employee before any money was returned to him. Additionally, the third party custodian/trustee (assuming there is one, as usual), should have required a signed written request for the distribution from the employee, explaining that this is a correcting distribution and not subject to early distribution penalties.

If there is any penalty indicated from the 1099-R coding, I would go back to the employer and ask for a corrected 1099, with casual reference to the US Dept of Labor rules and the ERISA rules on this issue. Without knowing the whole story, I think the employer is violating a bunch of rules here. -Bob