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  1. #11
    Join Date
    Feb 2008
    Posts
    1,157

    Default Re: Who is Responsible for Errors in a 401(K) Distribution

    agree it's 10% of the distribution, not just the taxes.....

  2. #12
    Join Date
    Mar 2013
    Posts
    17,610

    Default Re: Who is Responsible for Errors in a 401(K) Distribution

    Quote Quoting llworking
    View Post
    Jack,

    The early withdrawal penalty is 10% of the gross distribution, not 10% of the tax. The penalty on a 5000k distribution (if a penalty applied) would be 500.00.
    Oops!

    Still...

  3. #13
    Join Date
    Aug 2018
    Posts
    3

    Default Re: Who is Responsible for Errors in a 401(K) Distribution

    Thank you one and all for your responses.

    Regarding the exception, here is where I found the most clear-cut explanation: https://www.journalofaccountancy.com...utpenalty.html

    Further, other resources refer to "offset distributions"; effectively, since the loan was current (not in default) at the time of separation, and since the plan is being "shut down/closed out", the participant does not have the opportunity to pay off the loan...and while the loan amount is considered an early distribution, the 10% penalty does not apply.

    And yes-I've thoroughly read IRS Publication 575.

    So, any further thoughts, given the information provided in the link above?

    Quote Quoting hr for me
    View Post
    It is my understanding that the 10% penalty would apply either way unless her distribution meets very specific guidelines.: https://www.irs.gov/retirement-plans...-distributions The $5000 would have the 10% penalty distributed from either plan or the IRA unless you have an exception and I am not seeing anything you have written that falls under the ones i am familiar with. And you already stated she is not 59 1/2 which is the most common. I am not sure why you think her being 58 matters

    L1 on a 1099R just means an early distribution of a loan, which is correct because she lost her employment.

    "1 - Early distribution, no known exception (in most cases, under age 59 1/2).

    2 - Early distribution, exception applies (under age 59 1/2)."
    Read the section near the bottom of that page you linked, where it says "Separation of Service".

    Quote Quoting adjusterjack
    View Post
    If, by who is responsible, you mean who is going to give your wife extra money as punishment for their mistake, forget it, it's not going to happen.

    What will you have her do, sue somebody?

    Well, here's how you compute her monetary damages.

    The $5000 is taxable as ordinary income no matter which way you slice it. Let's say you are in the 25% tax bracket. Your nominal federal income tax on $5000 would be $1250.

    The penalty is 10% of $1250 = $125.00. That's her damages if she lost the exemption to the penalty.

    And may be less if you are in a lower bracket after deductions.

    With that in mind I agree with the other suggestions that she just leave it alone. The loan is paid, it's done. Trying to get anything reversed (as you know by now) isn't going to happen.

    Let it go.
    Wow...not wanting to go off-topic here, but, seriously? "Let it go"?
    So, if someone makes an "oops" that cost another person $500, and had that mistake not been made there would be no penalty, I should just toss away 5 Benjamins and "let it go"?

    If your bank/accountant makes an irreversible mistake that takes $500 out of your pocket, you would just leave it be? I find that very hard to believe...or, if the $500 doesn't matter much to you, God bless you for having resources to throw away that amount of money, but understand that, for some of us, $500 is a decent amount of money.

    Interesting that you focused entirely on this one item, and didn't bother addressing or looking into the other issues I raised.

  4. #14
    Join Date
    Oct 2006
    Posts
    15,983

    Default Re: Who is Responsible for Errors in a 401(K) Distribution

    Thank you one and all for your responses.

    Regarding the exception, here is where I found the most clear-cut explanation: https://www.journalofaccountancy.com...utpenalty.html

    Further, other resources refer to "offset distributions"; effectively, since the loan was current (not in default) at the time of separation, and since the plan is being "shut down/closed out", the participant does not have the opportunity to pay off the loan...and while the loan amount is considered an early distribution, the 10% penalty does not apply.

    And yes-I've thoroughly read IRS Publication 575.

    So, any further thoughts, given the information provided in the link above?
    How large is the loan?

  5. #15
    Join Date
    Sep 2010
    Posts
    19,480

    Default Re: Who is Responsible for Errors in a 401(K) Distribution

    How old was your wife when she was terminated?

  6. #16
    Join Date
    Aug 2018
    Posts
    3

    Default Re: Who is Responsible for Errors in a 401(K) Distribution

    Quote Quoting llworking
    View Post
    How large is the loan?
    $18,352.00.

    Quote Quoting flyingron
    View Post
    How old was your wife when she was terminated?
    58 years, 27 days.

    The distribution/rollover form specifically required entry of plan participant's birth date as mm/dd/yyyy; for my wife, it's 04/29/1960.

    Date of termination-05/25/2018.

  7. #17
    Join Date
    May 2017
    Location
    Florida
    Posts
    355

    Default Re: Who is Responsible for Errors in a 401(K) Distribution

    I believe the distribution of the loan amount will be set as of the date it was no longer repayable, i.e. the date her employment terminated. If that is the case, as I believe it is, then none of the distributed funds should be subject to a 10% early distribution penalty. Getting Aspire to correct documents is a small matter, and you and your wife can report the correct information with an attached explanation if that differs from the reporting documents from Aspire. It's best to get them to correct it obviously, but if they don't you are still required / entitled to report correctly on your tax return. As far as where to get the $5000, if it has already been rolled over then it's a simple matter to withdraw it though that creates another distribution for another year. That might be a good thing depending on what it does to your tax bracket.

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