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It sounds like you did everything correct. If the distribution is bieng processed in 2025 and the loan is being off set in 2025, it will be taxable income in 2025. You will presumably send her two 2025 1099-R one for the distribution of cash and one for the offset of the loan since they have separate 1099-R codes.

Amen to that! I am so sick of people who take no responsibility for their actions, and then try to blame someone else!!

I can’t believe Fidelity would do that even if they could do that.

@EPCRSGuru I have worked with Fidelity clients over the years and have never seen where Fidelity monitored the deferral limits for across plans for unrelated companies. Here are some comments. There is not requirement for a recordkeeper to monitor deferral limits, unless the recordkeeper wishes to provide that service and includes the service in their service agreement. I haven't seen any recordkeeper including having such a provision, but someone may have an example of a recordkeeper who does. The plan has an obligation to apply the salary deferral limits across all companies within a controlled group, and this typically is coordinated within the payroll function. This obligation is under 401(a)(30) and not under 402(g). Section 401(a)(30) reads: "(30) Limitations on elective deferrals.—In the case of a trust which is part of a plan under which elective deferrals (within the meaning of section 402(g)(3)) may be made with respect to any individual during a calendar year, such trust shall not constitute a qualified trust under this subsection unless the plan provides that the amount of such deferrals under such plan and all other plans, contracts, or arrangements of an employer maintaining such plan may not exceed the amount of the limitation in effect under section 402(g)(1)(A) for taxable years beginning in such calendar year." and includes by reference the amount of the limit that appears under 402(g). The plan does not have an obligation to monitor 402(g) limits which is the deferral limit applicable to the participant. Section 402(g) reads: "(g) Limitation on exclusion for elective deferrals (1) In general (A) Limitation ... (B) Applicable dollar amount For purposes of subparagraph (A), the applicable dollar amount is $15,000. (2) Distribution of excess deferrals (A) In general If any amount (hereinafter in this paragraph referred to as "excess deferrals") is included in the gross income of an individual under paragraph (1) (or would be included but for the last sentence thereof) for any taxable year— (i) not later than the 1st March 1 following the close of the taxable year, the individual may allocate the amount of such excess deferrals among the plans under which the deferrals were made and may notify each such plan of the portion allocated to it, and (ii) not later than the 1st April 15 following the close of the taxable year, each such plan may distribute to the individual the amount allocated to it under clause (i) (and any income allocable to such amount through the end of such taxable year). The underlined highlights that is it the participant's obligation to choose which plan or plans will distribution all or part of the excess, and to make sure the excess is removed in a timely manner. Given the circumstances in your OP, the failure to remove the excess most likely looks as if it is all on the participant.

Plus, DB plans aren't individual account plans even though in a one-man shop, it might feel obviously "allocable" to just the owner.

Keep good records on timing of deposits and which calendar year limit is applied to which deposit so you know what actually goes in your tests. I'm going to assume from your post this is the first you had recharacterization due to failed test and that he had no calendar year catch-up in prior years. For calendar year 2024 the limit is $30,500. To make it somewhat easy I'm going to say the participant defers $15,250 in the first 6 months and $15,250 in the second 6 months of calendar year 2024. You do your 6/30/2024 test and find he needs a "refund" of $2,500 to pass the test. Since he has only deferred $15,250 as of 6/30/2024 you have no refund but have now used $2,500 of the 2024 limit as of your 6/30/2024 test date. So when he defers the remaining $15,250 in the second half of 2024 $5,000 is recharecterized as 2024 catch-up (because $2,500 was already rechareterized on 6/30/24) and does not go into your testing for the plan year ending 6/30/2025. The remaining $11,250 along with any deferrals up to the 2025 402(g) limit in the first half of 2025 go into your 6/30/2025 testing. Hope that's clear and helps.

This was settled with Revenue Ruling 2019-19. If the check was written in 2024, it is reported by the plan as 2024 income to the participant. Any withholding is reported as withholding in 2024. Yes, the timing may seem unfair. Yes, the circumstances of the delay in cashing the check may have been beyond the control of the participant (lost in the mail, wrong address, the dog ate the check). None of this by itself changes the year of taxation for distribution. A case possibly may be made for a genuinely missing participant. Here is an excellent write-up about RR 2019-19 - https://www.blankrome.com/publications/questions-after-irs-guidance-uncashed-401k-checks Enjoy!