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Excess Deferral and Allocable Loss


CO Bank

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I am having a difficult time decoding how to distribute a loss.

We have an employee who deferred $1,000 into his 457 plan. The plan allows $18K in contributions for the year, which can be a combination of employee and employer monies.

In December we forecast that the employer contribution for the year would $18K. Our practice is to maximize the employer contribution first, thus we wanted to return to him his deferral amount. The $1,000 was returned to him via a negative contribution in December on his payroll. We did this in order for the w-2 to show that he did not contribute the $1,000.

After the return we calculated the gain/loss, and found that the $1,000 deferral he put into his account had shrunk to $900. This $900 was moved out of his account into what we call the negative account at the recordkeeper.

I understand that the excess deferral instructions state that the excess deferral plus any income allocable must be distributed out. We've taken a conservative view and determined that "income" includes losses as well as gains.

In order to distribute the loss to the participant, my thought is that we now instruct the recordkeeper to move an extra $100 out of the account. This would in effect make the loss realized in his account, and thus would mean the loss was allocated (I think).

Not sure if this is the best way, or only way, to administer. Would appreciate any insights.

Thanks.

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