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  1. #1
    Join Date
    Aug 2018
    Posts
    3

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

    My wife's employer shut down and permanently closed their business in May 2018...prior to this closure, their 401(k) plan administrator (a 3rd-party company, not the company's "internal" representative) gave each applicable employee a form to complete; this form contained various options for specifying how and where the employee's funds were to be distributed, as well as pertinent personal information (name, address, date of birth, SSN).
    My wife completed the form as follows:
    1. Requested a $5000 distribution payable to her, to cover federal taxes on an existing loan against her 401(k) funds;
    2. Checkmarked a box, specifying a 3% withholding to be paid to the State of NJ for said loan distribution; and,
    3. the remaining balance to be transferred to an IRA account, details of which were specified.

    The actual disbursement of funds did not take place until late July, for reasons that are not important; however, the administration company (Aspire Financial Services of Tampa, FL) failed to comply with the first 2 items ($5000 distribution and NJ tax payment)-instead, they transferred the entire fund balance to the IRA account, less the remaining loan balance.

    In addition, 1 of the 2 1099-Rs that she received had an incorrect distribution code-the loan distribution had a DC of "L1", which means that "no exception applies"; however, due to her age (58-which Aspire knew, due to her DOB supplied on their form) and that said distribution was due to a separation of service, this 1099-R should have a DC of "L2".

    Upon contacting Aspire, their representative first admitted the multiple errors, and indicated that they would send the new IRA account holder (Fidelity) a "Letter of Indemnity" to "retrieve" the requested $5000 amount, and reissue my wife a $5000 check and corrected 1099-Rs (THREE of them-one for the revised rollover amount, one for the loan distribution, and another for the $5000 distribution).

    Almost 3 weeks have passed, and nothing has been corrected...and we have been stonewalled when communicating with Aspire-whether by phone or email; as of this moment, the balance in her new IRA account has not changed, and we have not received new 1099-Rs.

    So, here are my questions:
    • Is there a time frame limit for Aspire to get this mess straightened out?
    • Does the new IRA account holder (Fidelity) have any legal obligation to comply with Aspire's request?
    • If this issue does not get resolved in a reasonable amount of time, can we, or should we, simply tell Aspire to cancel / stop what they're trying to do?
    • If Aspire cannot get this done reasonably soon, and we instead take the $5000 from the new IRA account, would Aspire be responsible for the certain 10% tax penalty, since it was their admitted mistake?
    • The controller at my employer said that, given the fact that we have kept a paper trail of emails which include Aspire admitting their error, my wife and I could file a paper 1040, include the supporting documentation, and avoid the 10% penalty; is this true?

    Any and all suggestions and advice are welcomed and appreciated!

    Mike

  2. #2
    Join Date
    Feb 2008
    Posts
    1,159

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

    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)."

  3. #3
    Join Date
    Sep 2010
    Posts
    19,484

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

    I agree with HR, regardless of how the rollover gets "unscrewed" she owes the 10% penalty on the amount that cover the repayment of the loan balance. This is a early withdrawal (doubtful it comes under the hardship provisions but you could check that). Further any money she withdraws to cover taxes on this is also an early withdrawal and subject to its own tax and 10% penalty.

    It may be easier to just tell Aspire to forget it and withdraw from the IRA yourself. Fidelity is a whole lot easier to deal with than these small providers.

    There's no way out of the 10% penalty. That wasn't a mistake.

  4. #4
    Join Date
    Jun 2006
    Location
    Massachusetts
    Posts
    24,245

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

    Nothing that has been posted comes even close to meeting the IRS definition of a hardship withdrawal, sorry.

  5. #5
    Join Date
    Sep 2010
    Posts
    19,484

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

    We don't know why they took the loan to begin with, but as I said, it's unlikely.

  6. #6
    Join Date
    Jun 2006
    Location
    Massachusetts
    Posts
    24,245

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

    The reason they took the loan is immaterial. THIS distribution does not qualify as a hardship, and even if the loan was for a reason that could have been done as a hardship, that doesn't make a distribution to pay it back qualified for one.

  7. #7
    Join Date
    Feb 2008
    Posts
    1,159

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

    agree that the loan reason doesn't matter, just that it has come due and payable at termination. Hardships are something totally different although some 401(k) plans do require an employee to take a loan prior to taking a hardship withdrawal. In the end the hardship would be immediately taxed, where it is possible the loan is taxed less (at the time depending on how many payments had been made at the termination date).

    i dont' see anyway to avoid the penalty but do agree the best choice is to stop any retrieval from the old recordkeeper/TPA and to just take a distribution from the IRA at this point to cover taxes.....(and that amount will also be taxed along with the 10% penalty)

    There honestly aren't any damages at all....because in the end you will be paying the same amount regardless of where the actual $s come from.

    (And this, to all my friends, it why I try to strongly discourage 401k plan loans.....you never know and must always be prepared to get taxed on the loan balance in any given year -- because life happens!)

  8. #8
    Join Date
    Oct 2006
    Posts
    15,988

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

    Quote Quoting patnmike427
    View Post
    My wife's employer shut down and permanently closed their business in May 2018...prior to this closure, their 401(k) plan administrator (a 3rd-party company, not the company's "internal" representative) gave each applicable employee a form to complete; this form contained various options for specifying how and where the employee's funds were to be distributed, as well as pertinent personal information (name, address, date of birth, SSN).
    My wife completed the form as follows:
    1. Requested a $5000 distribution payable to her, to cover federal taxes on an existing loan against her 401(k) funds;
    2. Checkmarked a box, specifying a 3% withholding to be paid to the State of NJ for said loan distribution; and,
    3. the remaining balance to be transferred to an IRA account, details of which were specified.

    The actual disbursement of funds did not take place until late July, for reasons that are not important; however, the administration company (Aspire Financial Services of Tampa, FL) failed to comply with the first 2 items ($5000 distribution and NJ tax payment)-instead, they transferred the entire fund balance to the IRA account, less the remaining loan balance.

    In addition, 1 of the 2 1099-Rs that she received had an incorrect distribution code-the loan distribution had a DC of "L1", which means that "no exception applies"; however, due to her age (58-which Aspire knew, due to her DOB supplied on their form) and that said distribution was due to a separation of service, this 1099-R should have a DC of "L2".

    Upon contacting Aspire, their representative first admitted the multiple errors, and indicated that they would send the new IRA account holder (Fidelity) a "Letter of Indemnity" to "retrieve" the requested $5000 amount, and reissue my wife a $5000 check and corrected 1099-Rs (THREE of them-one for the revised rollover amount, one for the loan distribution, and another for the $5000 distribution).

    Almost 3 weeks have passed, and nothing has been corrected...and we have been stonewalled when communicating with Aspire-whether by phone or email; as of this moment, the balance in her new IRA account has not changed, and we have not received new 1099-Rs.

    So, here are my questions:
    • Is there a time frame limit for Aspire to get this mess straightened out?
    • Does the new IRA account holder (Fidelity) have any legal obligation to comply with Aspire's request?
    • If this issue does not get resolved in a reasonable amount of time, can we, or should we, simply tell Aspire to cancel / stop what they're trying to do?
    • If Aspire cannot get this done reasonably soon, and we instead take the $5000 from the new IRA account, would Aspire be responsible for the certain 10% tax penalty, since it was their admitted mistake?
    • The controller at my employer said that, given the fact that we have kept a paper trail of emails which include Aspire admitting their error, my wife and I could file a paper 1040, include the supporting documentation, and avoid the 10% penalty; is this true?

    Any and all suggestions and advice are welcomed and appreciated!

    Mike
    For a qualified employer provided plan there is an exception to the 10% penalty if the withdrawal is due to being separated from service if you are over 55. You are correct that if you rolled it over into an IRA that exception would not be available. However, that only applies to the 5000.00 withdrawal that she wants to make to help cover taxes for the loans that will be treated as distributions.

    I believe that the loans themselves will still be subject to the 10% penalty so I do not believe that Aspire made a mistake on that 1099R. However, at the same time I do not understand at all why Aspire is issuing 1099Rs now, when they are not supposed to be doing so until January 2019.

    Also, I do not understand why they would need to issue a third 1099R for the 5000.00 since the 5000.00 and the rollover could easily be handled on one 1099R.

  9. #9
    Join Date
    Mar 2013
    Posts
    17,616

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

    Quote Quoting patnmike427
    View Post
    Who is Responsible for Errors in a 401(K) Distribution
    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.

  10. #10
    Join Date
    Oct 2006
    Posts
    15,988

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

    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.
    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.

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