Disallowed Deferrals

[Beemer]

If fewer than 50% of eligible employees make elective deferrals, and all of the elective deferrals are disallowed, do the elective deferrals count against the annual addition limitation?

Thanks

[Gary Lesser]

I believe they would count against the 415 limit.

From 1.415©-1(b)(ii)--

(ii) Certain excess amounts treated as annual additions. Contributions do not fail to be annual additions merely because they are excess contributions (as described in section 401(k)(8)(B)) or excess aggregate contributions (as described in section 401(m)(6)(B)), or merely because excess contributions or excess aggregate contributions are corrected through distribution.

[Guest sugar daddy]

do they go against the 402(g) limit? a terminating SARSEP is returning all their deferrals for 2011 and they are wanting to defer the max into their newly established 401(k) for 2011.

[Gary Lesser]

Yes, the annual additions do seem to be (remain) "employee's elective deferreals" and governed by 402(g). [see SARSEP LRM, section II, items (6) and (7).]

That being said, I am not sure how they are to be treated for ADP purposes under the 401(k) plan.

They can not just be returned. A special Notice is required in accordance with plan provisions; and the participants can remove the disallowed deferrals without penalty (if by April 15 following notification). See SARSEP LRM, section II, items (2) and (3)

The SARSEP LRM is available at: http://www.irs.gov/pub/irs-tege/sarsep_lrm.pdf

[Guest sugar daddy]

Yes, the annual additions do seem to be (remain) "employee's elective deferreals" and governed by 402(g). [see SARSEP LRM, section III, items (6) and (7).]

That being said, I am not sure how they are to be treated for ADP purposes under the 401(k) plan.

They can not just be returned. A special Notice is required in accordance with plan provisions; and the participants can remove the disallowed deferrals without penalty (if by April 15 following notification). See SARSEP LRM, section II, items (2) and (3)

The SARSEP LRM is available at: http://www.irs.gov/pub/irs-tege/sarsep_lrm.pdf

Gary,

I do not see a (6) and (7) under Sec II in your link.

What would be the reasoning behind treating refunds of disallowed deferrals to count towards the 402(g) limit?

[Gary Lesser]

Sorry, (6) and (7) were in Section III (post corrected).

They are elective deferrals and 402(g) limits elective deferrals. I find nothing to suggest that excess or dissallowed elective deferrals are not within the purview of IRC 402(g).