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CCH® PENSION AND BENEFITS — 04/08/09

401(k) corrective distributions must be reported on Form 1099-R as taxable to recipient in year of distribution

In the Spring 2009 issue of Employee Plans News , the IRS has cautioned 401(k) plan sponsors that corrective distributions of excess contributions and excess aggregate contributions must, beginning in 2009, be reported on Form 1099-R as taxable to the recipient in the year of distribution.

Taxation of corrective distributions

Corrective distributions of excess contributions and excess aggregate contributions (adjusted for earnings) are taxable to the recipient participant in the year of distribution. Under the law in effect prior to January 1, 2008, corrective distributions of excess contributions or excess aggregate contributions (with the exception of distributions under $100) that were made within 2 1/2 months after the close of the plan year were treated as received and earned in the tax year for which the contributions (and not the distributions) were made.

The modified rules effectively relieve participants of the need to file an amended return in the event excess contributions are returned to them after they have filed the prior year’s tax return.

Report corrective distributions on Form 1099-R

Beginning in 2009, corrective distributions must be reported on Form 1099-R as taxable to the recipient in the year of distribution. The payer, the IRS explains, must complete Form 1099-R by:

• Stating the amount of the distribution in Box 1;
• Reporting the taxable amount of the distribution in Box 29; and
• Classifying the distribution as taxable in the year distributed by using Code 8 in Box 7.

Issue 1099-R by February 1, 2010

The 2009 Form 1099-R must be provided to recipients by February 1, 2010 (as January 31, 2010 is a Sunday).

SOURCE: IRS Employee Plan News, Volume 9/Spring 2009.

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