Employer closed out a 403(B) plan, with transfers to individual annuities. Certain transfers were incorrect (too small) for certain participants, due to a clerical error. Employer now wants to make these people whole and was planning on issuing checks and reporting via 1099-R, however checks would be drawn on general account of employer, not on any tax-qualified source. Is there any way to make the corrections to a tax-qualified vehicle for these persons (403(B)/IRA)? The insurance company that maintained the group annuity does not hold any accounts for these individuals. Any comments or ideas are suggested.

Is it possible to add the money to the individual annuities? IRS has in general been pretty lenient in examining corrective transactions. However, if the money cannot be put into a 403(B) contract at all, I cannot see how it would escape being wages subject to normal wage withholding and reporting.

Following up on my earlier response, the court in LTV Steel Co. v. United States, Fed. Cl., No. 96-303-T (10/16/98) treated direct payments from an employer, made in lieu of payments from a qualified plan, as being part of a nonqualified deferred compensation arrangement. This confirms my earlier fears that if the employer makes the corrective payments directly, they would be subject to Form W-2 reporting and FICA as well as income tax withholding.