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What to know about the 1099-R form

Published by Kim Moore on Apr 5, 2021 6:00:00 AM

What is a 1099-R Form?

If you are the Plan Administrator for your company 401(k) Plan, I’m sure you already know what a 1099 Form is. You could have received one for work or other types of compensation not involving an employee/employer relationship. However, what you may not have thought about is when a plan participant takes a withdrawal from their 401(k) Plan, it becomes a taxable event, and the issuance of a 1099-R form is required. Generally, in this case the service provider will fully complete this transaction.

The service provider will be the one disbursing the funds, preparing the 1099-R form, and sending it to the employee. Though, as Plan Sponsor, this function is ultimately your responsibility. It is imperative that you understand how the forms are generated, provided to participants, the timing of these events, and that you ensure the process is complete and accurate.1099-R form notes

401(k) Plan participants will receive a 1099-R form under the following circumstances:

  • They request a distribution from their account following termination (this is true even if the funds are rolled over to another qualified account).
  • They receive a distribution while still employed such as an in-service distribution or hardship withdrawal.
  • They receive contributions back/refunded because of an excess contribution made or the Plan fails an element of discrimination testing which requires a refund of contributions to employees.
  • The employee defaults on a participant loan from the Plan or they terminate employment with an outstanding loan that is not later repaid.

It is important to review the procedures with your service provider to ensure the forms are sent to participants timely so they can incorporate the information into the relevant personal tax return filed. Also, ensure the amounts shown on the form are correct (taxable amount, taxes withheld, etc.). This will impact the individual taxes owed by the participant/employee. Lastly, the coding on the form is relevant. For example:

  • A code of “G indicates the money distributed was immediately rolled into another qualified Plan which makes the distribution not taxable at the point of distribution.
  • A code of “8 indicates this is an excess contribution refund including earnings which is taxable at the regular tax rate of the individual.

An incorrect coding could force the participant/employee to pay more tax than is due.

Although we acknowledge that the distribution function in many plans is handled by service providers, we encourage plan sponsors to review the procedures in this area as errors can cause significant issues for their employees or former employees when funds are distributed out of the 401(k) Plan.

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At Summit CPA we specialize in retirement plan audits. If you would like to discuss our audit process in more detail or need an audit contact our office at (866) 497-9761 to schedule an appointment. We can help you navigate the world of the 401(k) audit as proficiently as possible. We also offer off-site assistance and flat-fee pricing so there are no surprises when the job is complete.

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