403b Settlement

NotACPA

My wife just received a check from the Class Action Settlement related to mis-management of her 403b accounts by a former, not-for-profit, employer.

Those 403b accounts existed in her QDF before we got married, but all of the funds had been removed from them and transferred to her Rollover IRA.  When we got married, I manually combined (on 1/1/17) her accounts into my (now, our) QDF.

My question is, how should I record the receipt of the funds, from which taxes were withheld since they weren't rolled over into her RIRA.  The funds will be reported in January on a 1099-R

Boatnmaniac

403b plans are very similar to 401k and IRA plans regarding taxes.  In early 2021 I'm assuming she will be receiving a 1099-R form reporting the settlement check as a retirement plan distribution.

Assuming my understanding is correct, I would probably categorize this settlement check just like I would categorize a distribution from my IRA.  I would probably do a split category deposit (to checking or some other taxable cash account):

• Transaction amount:  The amount of the check.
• 1st line category:  The gross amount of the distribution (the amount of the check plus the amount of taxes withheld) as a positive number and categorized as _401WithdrawalSpouse.
• 2nd line category:  The federal tax withheld as a negative number and categorized as _401FedWithheldSpouse.
• 3rd line category (if needed):  The state tax withheld as a negative number and categorized as _401StateWithheldSpouse.

I'd also probably put a note in the memo fields identifying this transaction as the 403b settlement distribution.

Frankx

Hi @NotACPA,

So, as I am sure you know, the 1099-R form is used to report distributions from retirement or profit plans, IRS's, SEP's, annuities or insurance contracts.  The circumstances of this particular distribution and somewhat unusual - since they relate to "mismanagement of an employer" - but it does seem to make sense to use the 1099-R, since it is likely that mismanagement caused plan participants to lose returns/gains on the mismanaged funds in the plan.

Also, most settlements from lawsuits are, in fact, taxable income to the recipient (with the one exception for settlements related to damages "on account of personal physical injuries or sickness" - which are excludable from income).  So I would suggest that the settlement amount be recorded as a pension distribution, and of course the tax withholdings would be recorded as prepaid taxes for tax year 2020.

Hope this helps.

Frankx

Boatnmaniac

403b plans are very similar to 401k and IRA plans regarding taxes.  In early 2021 I'm assuming she will be receiving a 1099-R form reporting the settlement check as a retirement plan distribution.

Assuming my understanding is correct, I would probably categorize this settlement check just like I would categorize a distribution from my IRA.  I would probably do a split category deposit (to checking or some other taxable cash account):

• Transaction amount:  The amount of the check.
• 1st line category:  The gross amount of the distribution (the amount of the check plus the amount of taxes withheld) as a positive number and categorized as _401WithdrawalSpouse.
• 2nd line category:  The federal tax withheld as a negative number and categorized as _401FedWithheldSpouse.
• 3rd line category (if needed):  The state tax withheld as a negative number and categorized as _401StateWithheldSpouse.

I'd also probably put a note in the memo fields identifying this transaction as the 403b settlement distribution.

NotACPA

BUT, a "personal distribution" from WHAT?

Those 403b accounts don't exist in our combined QDF.

SO, I guess, the question is really "Where do I put the money (and how), before I record the distribution"?

I'm quite reluctant to re-create the 403b account (which would only have 2 transactions in it) simply to make the deposit and immediate w/d.

BTW, part of this is a problem of my own making.  If I had found the paperwork earlier, I could have directed the payment as a rollover to her RIRA ... which would eliminated the whole 1099-R aspect.

And I don't want to deposit it into here RIRA, and withdraw it from there, since then I'd have 2 1099-Rs from the same account.

Jim_Harman

Since the original account no longer exists, I would just make it a Deposit in the taxable account, using the Categories suggested by @Boatnmaniac.

It's like a paycheck or a payment from Social Security.

Frankx

Hi again @NotACPA,

I said a "pension distribution" - not personal.  And it is simply an income entry:

Debit - the bank account at which you deposited the check (an asset account)
Credit - Pension Income (an income/revenue account)

It's like you won the lottery - its not a distribution from one of your investments or accounts.

Hope this is a little clearer.

Frankx

Boatnmaniac

@NotACPA -  The suggestion I'd made was based on similar personal experience with a 401k plan I used to participate in.  

If you want your Tax reports/forms in Quicken and Tax Planner to properly capture your wife's settlement check I suggest you use the category splits mentioned in my previous reply. 

No need to create a new retirement account for it because prior to the settlement and your receipt of the check that money simply did not exist and would not have been included in any net worth calculations or investment returns, anyway.

Just deposit the check like you deposit any other check (using the name of the payor on the check) and categorize it.  I think you'll be satisfied with how Quicken captures the data for it.  If you don't like it you can always delete it later and try something else.

NotACPA

@frankx, Sorry about the misread.  Old eyes.

AND, to all, I simply hadn't thought of using the _401K.... categories directly.  My mind was running down the track that the deposit into the taxable account had to be a transfer from something.

Frankx

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NotACPA

Her Total Distribution was about $250, and the net about $200.

BUT, as would be expected of me ... I just wanted to get the accounting right.,

BTW, the claims in the Class Action was that the 403b Trustees selected a  provider with investment options that performed poorly,  and that the costs for those investments were too high.  And that the Trustees didn't properly supervise such.

In the Judges "Order on Attorney's Fees" , he wrote that "the risk of nonpayment was high because no other excessive 403(b) fee lawsuit had been filed".  Trial Counsel got 1/3 of the total recovery (about $4.8million), since they had taken the case on contingency.

If anyone else has questions about their 401k/403b fees, the website for the case is here: https://vanderbilt403bsettlement.com/