BACKGROUND: 401(k) Plans are subject to an Average Deferral Percentage (ADP) test. Test failure usually results in Excess Contributions being distributed to "Highly Compensated Employees". 12/31/2000 test corrections – refunds - made before 3/15/2001 exempt Employers from paying excise tax on excess. If refund is made within 2-1/2 month correction window, Recipient must report excess for year deferred (2000 this example.)

Payor reports the refund of excess contributions on year 2001 IRS FORM 1099-R which isn’t issued to Recipient until January 31, 2002.

To avoid Recipients having to go back and amend the 2000 tax return, we advise Recipients of prior year tax liability at time of distribution, giving identical information that will appear on the 2001 IRS form 1099-R. This information usually includes the IRS Distribution Code "P", identifying on the 2001 Form 1099R that the distribution is taxable in the prior year, 2000.

PROBLEM: We have received complaints from Recipients (or their CPAs) that some 2000 tax software packages do not accept the "P" code. Has anyone else experienced this problem and if so, which software and what was the solution?

At my CPA firm we report the 1099R (that has a P designation) as part of a total distribution and then indicate a zero in the taxable distribution part of the Form. This seems like such an easy solution that I don't understand the problem.

Usually the information about the plan is already proformaed because we had reported the income in the prior year.