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Overpayment from Terminated 401(k) Plan II


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Seller 401(k) plan is terminated mid-year. The 415 regs provide that in such case the limits are reduced pro-rata based on the plan termination date.  As a result of the reduction, 415 was exceeded for some participants who terminated employment and took their balances (with the excess amount).  EPCRS Section 6.06(4) indicates that if a former employees does not return an overpayment, then the employer or “other person” must put the funds in the plan's forfeiture for use for future contributions.  But here the plan is terminated and so there will not be any future contributions and all funds int he forfeiture account will be used to pay expenses.  Is there an argument that in this case there is no need for the employer to put the funds into plan because this plan is not harmed if the funds are not returned as the other participants will not get the funds?  Thoughts.

 

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Can part of the 401(k) be refunded as excess annual addition to make the correction?

I realize you can't make the correction because funds have been distributed but I would think you could use similar to procedures like what happens when a Plan fails the ADP test after an HCE takes a total distribution. Something like send a letter to the affected participants that you received a distribution of $Y but that $X portion of their distribution is an excess annual addition and not eligible for rollover. If $X has been rolled over they must withdrawal it form their IRA along with earnings as an excess IRA contribution. Failure to do so will result in 6% excise tax each year they remain in the IRA.

Issue two 1099-Rs one for ($Y - $X) with the normal code for distribution chose, and one for $X with Code E for the excess annual addition.

Assuming the Plan has language  to refund employee contributions first on excess annual additions. Or am I missing something?

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