Tax Consequences of Repayment of Excess Distributions (Posted February 22, 2005) Technical Tip 139: The following question and answer were from the IRS Q&A Session at the 2003 ASPPA Annual Conference: An employee retired and received a single-sum distribution from the employer’s defined benefit plan in March of 2002. The defined benefit plan is a qualified plan which does not provide for employee contributions. In June of 2002, it was determined that the single-sum distribution was miscalculated and the employee received an overpayment of $2,000. In accordance with the plan’s procedures, the administrator of the plan notified the employee of the overpayment and demanded repayment with appropriate interest. a. What are the tax consequences to the employee if the overpayment is repaid to the plan in 2002? b. What are the tax consequences to the employee if the overpayment is repaid to the plan in 2003? Response: Revenue Ruling 2002-84 provides guidance for this situation. If the overpayment is repaid to the plan in the same taxable year as the overpayment, the amount overpaid reduces the taxable amount received by the participant from the plan. Therefore, in 2002, the taxable amount to the participant is the amount of the single-sum distribution, reduced by the amount repaid to the plan. If the amount of the overpayment is repaid in 2003 or a subsequent taxable year, the participant would be entitled to a deduction under Code section 165(a) for the amount repaid to the plan because the amount of the plan overpayment is attributable to compensation for services rendered to the employer. The taxpayer, but only if the taxpayer itemizes his or her deductions. View all Tips © 2012 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.