MEMORANDUM #24, 2012

Commonwealth of Massachusetts | Public Employee Retirement Administration Commission
Five Middlesex Avenue, Suite 304, Somerville, MA 02145
Ph 617 666 4446 | Fax 617 628 4002 | TTY 617 591 8917 | www.mass.gov/perac
Domenic J. F. Russo, Chairman
Auditor Suzanne M. Bump | Alan Macdonald | James M. Machado | Donald R. Marquis | Robert B. McCarthy | Gregory R. Mennis

Joseph E. Connarton, Executive Director


M E M O R A N D U M

TO:           All Retirement Boards

FROM:    Joseph E. Connarton, Executive Director

RE:           Correction of Erroneous Employee Contributions

DATE:      February 29, 2012

Questions have been raised as to the appropriate treatment of mistaken, excess member contributions to a retirement system under Chapter 32.  These mistaken member contributions may occur for different reasons – erroneous compensation, a mistake in service purchase calculations, membership errors, etc.  The Commission has consulted with its federal tax counsel to consider appropriate approaches to correct these mistaken contributions.  Among these different approaches, tax counsel has advised that processing payments of mistaken contributions from the retirement system to the member, in the manner described below, would be a reasonable and administerable approach to correct these errors.
The amount of the mistaken contributions would be paid in a lump sum to the member as a "corrective distribution."  The corrective distribution would be reported on a separate Form 1099-R for the year in which the corrective distribution is made, as follows:

If the mistaken contributions were pre-tax (i.e., picked-up):

Box 1

total distribution amount

Box 2a

total distribution amount

Box 2b

blank (both boxes)

Box 4

10% withholding applies to taxable amount unless member elects no withholding

Box 5

blank

Box 6

blank

Box 7

Code E

If the mistaken contributions were after-tax:

Box 1

total distribution amount

Box 2a

blank

Box 2b

blank (both boxes)

Box 4

10% withholding applies to taxable amount unless member elects no withholding

Box 5

contributions amount

Box 6

blank

Box 7

Code E

For all of these mistaken employee contribution corrective distributions, the following rules are applicable:

Also, it may be helpful to send a letter to the member explaining that a Form 1099-R is being issued for a return of employee contributions which were not authorized under Massachusetts law, and that Code E was used in Box 7 because the system is following the principles of Revenue Procedure 92-93 in making this corrective distribution.