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overcontribution to 403B for yr. 2000


Guest kristengordon

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Guest kristengordon

Hi I'm having a tough time getting a correct answer to this problem and I'm wondering if you can help me. We have a client who has overcontributed to his 403B account for both the years 2000 and 2001…and it was just caught. We sent in overcontribution paperwork for him and they were only able to distribute the funds from the 2001 overcontribution. They said that the funds that were overcontributed for the year 2000 they would not be able to distribute because it is past 4/15/01 and that he would need to contact his tax advisor.

Here's the problem. The tax advisor does not know what to do, she's thinking that he should just leave the funds invested, decrease the amount of this year's total 403B contribution by that amount, and that should take care of it.

I have a 403B distribution form and a phone call to the client to make. Can anyone help me with what our options are here? Thank you!!

P.S. thanks Joel for sending me in the direction of this form.

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Is this a 403(B) annuity, or a 403(B) custodial account/mutual fund? And did the overcontribution exceed the maximum exclusion allowance limits, the 402(g) limit on elective deferrals, or the 415 limits? The rules on what to do about overcontributions will vary depending on the answers to these questions, so a few more facts would help me simplify my response.

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The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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You may be having a difficult time because there is no correct answer. First who are "they"? the TPA, custodian, employer??

Secondly the only consequence of over contributing to a 403(B) annuity is the payment of additional income tax by the employee (additonal FICA tax is required only if the excess contribution was an employer payment). Also if the 403(B) plan used a mutual fund there is a 6% excise tax. At this point the excess contribution cannot be reversed. Decreasing the 2002 contribution will not correct the additonal tax liability for 2000.

But the application of the additional tax will be due only if the employer changes the employee's w-2 for 2000 to show additional taxable income. If no corrected w-2 is issued then there is no adverse tax impact to the employee and after April 15, 2004 there will not be any tax liability owed to the IRS unless the excess amount exceeds 25% of the AGI. If the w-2 is revised then the employee will have to pay the addional tax and can get reimbused from the employer/TPA for any penalities and interest because of the incorrect deferral.

mjb

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Guest kristengordon

this was an elective deferral overcontribution to a mutual fund 403B account.

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You might want to look at one of the correction programs on this. Under Rev. Proc. 2001-17, "The permitted correction method is to distribute the excess deferral to the employee and to report the amount as taxable in the year of deferral and in the year distributed. In accordance with [Treas. Reg.] section 1.402(g)-1(e)(1)(ii), a distribution to a highly compensated employee is included in the ADP test; a distribution to a nonhighly compensated employee is not included in the ADP test." Depending on the circumstances (e.g., how many errors like this there have been for this plan, whether the employer corrects voluntarily or decides to take the audit risk), the employer may also suffer penalties for failure to monitor the 402(g) testing in the first place. However, those are presumably not your client's problem.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Kristen: The tax liability for 2000 is income tax and 6% excise tax on excess contribution plus interest at AFR rate. The excess contribution will be treated as an after tax contribution. However this tax will be imposed only if the employee's w-2 is revised by the employer. Also check to see if employee is eligible for additional 403(B) deferral of $3,000 under IRC 402(g)(8) available to certain employees who can make special elections and have 15 years of service.

mjb

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It would seem to me that the employee would be obligated to report amounts that he knew should have been included in his income, regardless of whether the employer did an amended W-2. Of course, one gets into the question of whether an individual ever has an obligation to file an amended return if the first return was filed in good faith and the employee learns of the error only after that. However, that would cover only the year 2000 return; the excise tax is payable every year until the distribution. I think the issue of whether the employer revises the W-2 goes only to the issue of audit risk, not to whether the amount is taxable. Moreover, at this point, if the employee amended the 2000 return for some unrelated reason knowing that there was an overcontribution, I would have a hard time justifying a statement that he would be able to fail to report the income just because the employer got it wrong.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Carol: Dosen't your uncertainty as to what is a correct course of action go to the heart of the question ---what is an employee required to include as taxable income? Since the calculation of excludible amounts under 403(B) plans is extremely complex the govt places the burden of reporting excess contributions as taxable income on the employer under IRC 6051--- not the employee. At no point in this thread has there been any explanation of how the the excess contribution was determined-- without a revised W-2 how does the employee know if an excess amount has been contributed (and cannot even determine if the excess was correctly calculated). It is possible that the employee may eligible for a special election which could reduce or eliminate any excess contribution. The excise tax is only due on an excess contribution. If no w-2 is issued how does a taxpayer know what is the excess amount to pay tax on?

Finally I am mystified by your reference to ADP testing in a prior post since 403(B) plans are not subject to such testing.

mjb

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The reference to ADP was just a direct quotation from the revenue procedure, which covers all 402(g) excesses, not just those in 403(B) plans. You're right that it wouldn't be relevant to a 403(B) plan.

The issue really is whether the employee's obligation to report all "income" under section 61 is dependent on the employer's obligation to report the amounts under section 6051. I do not believe that it is. See, by analogy, TAM 199903032 (October 2, 1998), which held that an employee was required to include in income under 457(f) a contribution to an early retirement program even though the employee was not required either to withhold on the contribution or to report the contribution on the Form W-2.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Guest STLGiant

Are you sure the employer must amend the W-2? Isn't the distribution corrected by using Form 1099-R with a code noting that the distribution is for past year or previous year and a current year tax liability?? Once the 1099-R is issued, isn't it then the responsiblity of the taxpayer to amend their 1040?

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STL: My reference to W-2 was based on the facts which indicated that the 2000 contribution could not be distributed. Therefore there is taxable income for the excess salary reduction contribution. I agree that there would be a need to file an amended return once the appropriate revised reporting statement is filed with the IRS if there is an excess contributon. I think my point is that until the revised W-2 is filed there is no obligation by a taxpayer to file an amended return because there is no additonal income to report. It is only after the revised form is filed that that tax payer has notice of the additional income and can decide whether it is correct or can be contested. It is possible that the employee can exclude the excess contribution under a special election.

mjb

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Guest STLGiant

MJB, FWIW I've seen a couple vendors handle it the following way. The Employer doesn't issue an amended W-2 or W-2c. The Vendor issues two 1099-Rs, one for the year of distribution, the other for the year of the excess. They use Code 2, 8, D or P. If the year of excess is prior to 2000 and can be corrected using 1.415-6(B)-(6)(iv) (SEE 1099-R Instructions specific to Excess Annual Additions under Section 415 and the paragraph thereafter entitled Certain Excess Amounts Under Section 403(B) Plans. I think the employer's only onus is to inform the participant that they have a taxable event for a past tax year (one that's not closed). Have you seen vendors handle it differently? Have you seen employer's issuing W-2C's? Thanks in advance for you reply.

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