IBA Compliance Connection

Your go to source for compliance!

We have a customer who requested a direct rollover from their 401(k) account to an IRA with us. We just received a letter from the customer’s employer stating that certain funds were not eligible for the rollover and must be returned. The employer used Distribution Code G to identify the direct rollover on its 1099-R Form. How do we code the amount on our Form 5498 to reflect the return?

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We recommend consulting with an accountant or tax professional for guidance on this issue, but our understanding is that Form 5498, which is filled out by banks as IRA trustees or custodians, does not use distribution codes. The distribution codes (such as Code G for direct rollovers) are used in the 1099-R Form, which is filled out by the payee of IRA distributions, such as an employer with a qualified plan. In other words, we believe that it is up to the employer to identify and use the correct codes.

If the rollover and return occurred during this calendar year, both your bank and the employer may be able to simply ensure that your respective forms reflect the correct amount of the permissible rollover before filing them for this tax year. However, if your return of the ineligible funds will occur after your bank has filed its Form 5498, you may need to file a corrected Form 5498 identifying the error.

For resources related to our guidance, please see:

  • IRS Form 1099-R (2017), “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and IRA Contribution Information”

  • IRS Form 5498 (2017), “IRA Contribution Information”

  • 2017 Instructions for IRS Forms 1099-R and 5498, Guide to 1099-R Distribution Codes, page 16 (“Use Code G for a direct rollover from a qualified plan, a section 403(b) plan, or a governmental section 457(b) plan to an eligible retirement plan (another qualified plan, a section 403(b) plan, a governmental section 457(b) plan, or an IRA) . . . .”)

  • 2017 Instructions for IRS Forms 1099-R and 5498 (“Corrected Form 1099-R. If you filed a Form 1099-R with the IRS and later discover that there is an error on it, you must correct it as soon as possible. For example, if you transmit a direct rollover and file a Form 1099-R with the IRS reporting that none of the direct rollover is taxable by entering 0 (zero) in box 2a, and you then discover that part of the direct rollover consists of RMDs under section 401(a)(9), you must file a corrected Form 1099-R reporting the eligible rollover distribution as the direct rollover and file a new Form 1099-R reporting the RMD as if it had been distributed to the participant. See part H in the 2017 General Instructions for Certain Information Returns, or Pub. 1220, if filing electronically.”)

  • 2017 Instructions for IRS Forms 1099-R and 5498 (“Corrected Form 5498. If you file a Form 5498 with the IRS and later discover that there is an error on it, you must correct it as soon as possible. See part H in the 2017 General Instructions for Certain Information Returns, or Pub. 1220, if filing electronically. For example, if you reported contributions as rollover contributions in box 2, and you later discover that part of the contribution was not eligible to be rolled over and was, therefore, a regular contribution that should have been reported in box 1 (even if the amount exceeds the regular contribution limit), you must file a corrected Form 5498.”)