1099-R code U question

[sharonferris]

I got a 1099-R code U. When I enter the info, it asks what I did with the money. Moved it/returned it to account or did something else with it (cashed it out etc). I didn't do anything with the money. I never saw it. it's dividend distribution from ESOP. It then asks if all of it was rolled over or part of it (code U says is not eligible for rollover) How do I enter this information? And how do I answer the questions turbotax asks? I'm stuck. Please help!

[dmertz · Accepted solution]

Since it's not eligible for rollover, the only correct answer is that you did something else with it.  For a code U distribution, TurboTax will treat it as cashed out no matter how you answer the question and will flag an error if you indicate that you rolled it over.  (Why TurboTax bothers to ask the question is a mystery.)

Where is the ESOP dividend money now?

[sharonferris]

I believe the distribution was put into my 401k because the 1099-R came from the company that has the 401k.

[dmertz]

Code U represents a cash payment to you of dividends from ESOP shares.  Ignoring rollovers (which this cannot be), you are not permitted to put money into the 401(k) unless it's from compensation that otherwise would have been paid to you in your paycheck.  Perhaps it is structured as if it is an additional amount (equal to the ESOP dividend distribution) of elective deferral to the 401(k) from the compensation on your paycheck and the ESOP dividend distribution was paid to you on your paycheck, resulting in the net pay to you remaining unchanged.  In essence, you've received the ESOP distribution in cash and you've made an offsetting increase in your elective deferrals to the 401(k).

[sharonferris]

You’re absolutely right! It wasn’t going into the 401k, it was coming out of it. I finally figured it out with your help. The distribution is from dividends from employee stock in the 401k that was “cashed out” and sent to/reinvested in more employee stock not in the 401k. The IRS changed the way it’s reported. “Dividend distributions from an ESOP under section 404(k) will be reported on a Form 1099-R instead of a Form 1099-DIV”
Thank you so much. I really appreciate you taking the time to help me!

[dmertz]

Yes, code U was introduced for reporting 404(k) distributions occurring in 2009 and later years as a replacement for reporting on Form 1099-DIV:  <a rel="nofollow" target="_blank" href="https://www.irs.gov/irb/2008-26_IRB#ANN-2008-56">https://www.irs.gov/irb/2008-26_IRB#ANN-2008-56</a>

[Peggy22]

1099R was issued as a dividend payment from my IRA. Box 7 has code U, but the amount comes up as

Additional tax on IRAs or other tax-favored accounts. With a penalty for withdrawing money from my 401k. 

[dmertz]

@Peggy22 , entered correctly, a code-U Form 1099-R will likely not generate any such additional taxes on Schedule 2.  The additional taxes are likely coming from some other entry.  I suggest deleting the code-U Form 1099-R to confirm, then reenter this form.

[Peggy22]

Have tried that several times and will try again. As a long-time TurboTax user (since 1994), I will be done after this. Thanks for your help.

I got the same response from TurboTax, which makes me think there is an issue in TurboTax.

[dmertz]

Are you saying that deleting the code U Form 1099-R removes the Additional Tax from Schedule 2?