1099-R code "E" to correct a previous mistake

[bl1289]

Hello

Does anyone have any experience with the 1099-R box-7 code "E" which means the plan is correcting a previous error?

In 2014 I contributed to a 401K at a former employer. I then moved the funds to a rollover IRA and then to a Roth IRA. I received a 1099-R from the well-known and reputable plan administrator showing all these funds as code "G" and I paid my taxes as expected.

I recently received a corrected 2014 1099-R, which now shows most of the funds as still code "G", but a moderate amount is now reclassified as code "E", which apparently is an IRS program called EPCRS used to correct past errors by the plan administrator.

I am hesitant to start paying for expensive advice as to what if anything I need to do, especially since the underlying sums are not huge. I am tempted to just wait and let the IRS take their copy of the 1099 and tell me what they want me to do (if anything). I have done nothing wrong, and I don't think there is any legal obligation to amend a return absent fraud.

Anyone have any opinions?

Thank you

 

[kaneohe]

post your question at fairmark.com in the Retirement forum. Alan S. will give you the answer.

 

[gauss]

Hello

Does anyone have any experience with the 1099-R box-7 code "E" which means the plan is correcting a previous error?

In 2014 I contributed to a 401K at a former employer. I then moved the funds to a rollover IRA and then to a Roth IRA. I received a 1099-R from the well-known and reputable plan administrator showing all these funds as code "G" and I paid my taxes as expected.

I recently received a corrected 2014 1099-R, which now shows most of the funds as still code "G", but a moderate amount is now reclassified as code "E", which apparently is an IRS program called EPCRS used to correct past errors by the plan administrator.

I am hesitant to start paying for expensive advice as to what if anything I need to do, especially since the underlying sums are not huge. I am tempted to just wait and let the IRS take their copy of the 1099 and tell me what they want me to do (if anything). I have done nothing wrong, and I don't think there is any legal obligation to amend a return absent fraud.

Anyone have any opinions?

Thank you

I am not an expert in this, but if I were in your situation I would be worried that the amounts classified as Code E may not be "eligible rollover distributions" and thus this portion, that was rolled over to an IRA would be an improper rollover -- subject to the various penalties that would apply.

In theory the IRS could automatically compare all of your 1099-Rs for a year to all of your 5498s (received in May-June time frame) and detect the problem.

I would follow up with the IRA custodian who received the funds about correcting the situation. Be sure to mention the Code E on the 1099-R.

There are deadlines when these type of contributions can be corrected without penalty, otherwise I believe a 6% of the improper contribution would be due each year on form 5329 until the IRA no longer has excess contributions (in a cumulative sense).

If it is a small amount, you may just wish to contribute less to your IRAs next year than the max assuming you still have Earned Income. The amount less would be the amount of the improper (ie code e) amount that was rolled over. You would pay a 1 time 6% addl tax on the amount and then you should be good to go. No need to interact with your IRA custodian in this case.

Did you ask the question over at fairmark.com as suggested above yet? Did they say the same thing? Again they would be the true experts in this.

-gauss

 

[bingybear]

quote source

You may report the distribution of elective deferrals
(other than designated Roth contributions) and employee
contributions (and earnings attributable to such elective
deferrals and employee contributions) on the same Form
1099-R. However, if you made other distributions during
the year, report them on a separate Form 1099-R.
Because the distribution of elective deferrals (other than
designated Roth contributions) is fully taxable in the year
distributed (no part of the distribution is a return of the
investment in the contract), report the total amount of the
distribution in boxes 1 and 2a. Leave box 5 blank, and
enter Code E in box 7. For a return of employee
contributions (or designated Roth contributions) plus
earnings, enter the gross distribution in box 1, the
earnings attributable to the employee contributions (or
designated Roth contributions) being returned in box 2a,
and the employee contributions (or designated Roth
contributions) being returned in box 5. Enter Code E in
box 7. For more information, see Rev. Proc. 92-93,
1992-2 C.B. 505.
Similar rules apply to other corrective distributions
under EPCRS. Also, special Form 1099-R reporting is
available for certain plan loan failures. See section 6.07 of
Rev. Proc. 2013-12 for details.
If excess employer contributions (other than elective
deferrals), and the earnings on them, under SEP,
SARSEP, or SIMPLE IRA plans are returned to an
employer (with the participant's consent), enter the gross
distribution (excess and earnings) in box 1 and 0 (zero) in
box 2a. Enter Code E in box 7.

I had something like this decades ago... don't remember the codes where the employer messed up and made 401k contributions that exceeded the legal limit. If I recall I had to withdraw the over contribution + earnings and pay normal tax on them. I would think you should look at your statements to see if you can track an over payment by either you or your employer's match. Or call the call the sender of the 1099-R and ask what generated that code.
My event was in the late '90s... so a little foggie

 

[JoeWras]

There are deadlines when these type of contributions can be corrected without penalty, otherwise I believe a 6% of the improper contribution would be due each year on form 5329 until the IRA no longer has excess contributions (in a cumulative sense).

-gauss

Like gauss, I'm not expert. But I did some googling and read enough to convince me that you need to hop on this and not wait for the IRS to send you a bill. In some cases, that kind of thing is OK. I wouldn't risk it here.

Info on this is hard to parse, but enough googling shows there are deadlines for both the employer and for the employee to fix things. Let the deadline go, and it gets worse. And if your income was reclassified, you really need to figure it out.

I will say I am sorry to hear about this for you. This kind of thing burns me up. I've had amendments to my forms too that require filing amended tax returns. It is a huge pain in the you-know-where.

Here's a bogleheader who is facing something very similar: https://www.bogleheads.org/forum/viewtopic.php?t=161552

Royal mess on my hands amended 1099R code E
- what burns me up is, it seems that if we knew what to do last August ( if her company would have guided us) we could have refiled in time as an amended return for 2013 by Oct 15 and only would have had to deal with the ëarnings" -

 

[bingybear]

Like gauss, I'm not expert. But I did some googling and read enough to convince me that you need to hop on this and not wait for the IRS to send you a bill. In some cases, that kind of thing is OK. I wouldn't risk it here.

+1
I should have noted that the easy way in my case was to fix it by tax filing time in April... would get worst after that. But that was me many years ago.
Note also that I caught my over contribution not at 1099 time, but during the year when pay stubs noted the contribution. And the employer could not just "correct" the contribution. So I have time on my side... however I was working overseas at the time which made dealing with it more troublesome.

 

[gauss]

In 2014 did you (and any spouse) make IRA contributions? If so how much and what is the maximum that you could have contributed that year?
(Was your Earned Income over $5000 in 2014? Was your age 50 or older in 2014?). Perhaps this will be a non-issue if IRA contributions were not maxed out in 2014 or 2015.

Vanguard has a nice summary page on how to reverse "Excess Contributions", which I believe is what we may be looking at here (worse case).

https://investor.vanguard.com/ira/excess-contribution

TaxAct also has a nice writeup:
https://www.taxact.com/support/1280/2015/ira-or-roth-ira-excess-contributions/

Someone still needs to confirm if rolling over a Code E distribution is indeed always considered an Excess Contribution (ie not classified as an 'eligible rollover distribution') if Max IRA contributions have already been made -- (ie there may exist obscure exceptions), or it may fall under a different category then Excess Contribution.

In the short term, if you haven't filed 2015 1040 this year yet, I would hold off and file an automatic 6 month extension instead (form 4868) to buy yourself some time to handle this properly and avoid more rework. Be sure to send in a payment with your 4868 if you expect to owe money (and include a 6% penalty on the code E amount when calculating if you will owe or not).

If it turns out you don't owe the 6% penalty for 2015 then it will be refunded when you file 2015 1040.

Don't panic, if you handle this right you will have until Oct 2016 resolve this. If not resolved by Oct 2016, then you may owe an additional 6% for 2015 on the 2014 code E amount (depending on your 2015 IRA contributions). which would be paid on your 2016 return in spring of 2017.

In summary there are two parts to this problem.
#1) Determine if indeed a problem exists.
then only after determining the answer to #1)

#2)Corrective steps to take to cure any problem found to exist in #1) (ie lower present or future year IRA contributions, remove Excess Contributions, pay any 6% penalty that may apply on years Excess Contributions exist).

I recommend that you don't mix up these two steps. Don't start #2) until you fully understand #1).

-gauss

 

[bl1289]

Thanks for the replies about 1099-R code E

Hello

Thank you to all who posted replies! They were very useful!

I have put my 2015 filing on hold and filed for an extension. I think the advice that this issue likely impacts my 2015 filing is probably accurate.

I now agree that this is something I should deal with proactively, rather than just waiting to see if the IRS notices anything wrong.

I did post to fairmark.com and had multiple interesting exchanges with Alan S, who sounds extremely knowledgeable. The subject is very complex. Each of his sentences seems to take me 5-10 minutes to process.

I am told that my plan administrator has prepared a letter that should have accompanied my updated 1099-R's but did not. I am hopeful that when I get hold of the letter it may provide additional useful information.

I am annoyed that my plan administrator did not move more quickly to solve this issue. The problem was first detected in 2015-May. The plan lawyers took 6-7 months to decide what to do, and another 4 months or so to implement their decision. I think if they had acted before the 2015-October extended filing deadline my current issue would be easier to resolve.

The amount shown as code-E is about $4,000. I made about a $3,500 IRA contribution in 2014, so it may be possible to take most of the code-E money and treat it as an IRA contribution for 2014 instead. One possible obstacle is that I had very low earnings in 2014 and IRA contributions are not supposed to exceed earned income. However since the code-E money was originally a 401K contribution but has now been retroactively deemed incorrect, it would seem logical to now treat it as earned income and eligible for contribution to an IRA.

Unfortunately I have already maxed out my IRA contribution for 2015, so any funds that I cannot claim as an IRA contribution for 2014 may need to be carried forward to 2016.

Again thanks to everyone for their help. When I get more info I will post an update.

 

[JoeWras]

B1289: good plan of action. You have time now with the extension. But it is going to take you some work. Sorry to hear that.

Your plan administrator's slowness seems to mirror that of the person I quoted above. It is really unfortunate that they can do these amendments and cause so much pain and work for the employees of the plan.

 

[bl1289]

An update a year later.

I went back and filed an amended 2014 tax return. It showed an inappropriate 401K contribution. This was carried forward to 2015, and then the funds counted as my regular IRA contribution for 2015.

I incurred significant costs - mostly CPA fees, but also IRS penalties, interest etc. Most of all this was a long-running time sync headache.

After it was over I totaled it all up and sent a demand letter to my former employer, requesting reimbursement of about $4800 in costs. They referred my letter to the legal department where it sat for months and months as these things always do. Eventually they decided to approve a payment for about $1400. I had incurred $1800 in relevant CPA fees, but they capped those at $500. It isn't really satisfactory, but it is time to put this subject behind me and move on.

Thanks again to all who provided advice.

 

[gauss]

Thanks for the update and for the story of how writing to the legal department worked out somewhat.

Glad to hear that it sounds like it is behind you now.

-gauss