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If a participant has excess deferral, and when calculation the gain/loss the participant incurs a loss. I thought the proper procedure was to refund the full amount back to the participant and the loss was reported on the participants taxes. per the below, I this method might not be correct. (2007) IRS Publication NO 525 Elective Deferrals Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you . Include the loss as a negative amount on Form 1040, line 21 and identify it as "Loss on Excess Deferral Distribution". Please advise if the amount should be reduce by the loss.

If anyone has an opinion and/or something they have found from the powers-that-be, please share. This has stumped several colleagues but I'm sure it can't be a totally unique situation. ABC Company has a deferral-only 401(k) plan (no match or non-elective provisions) with one key employee Fred, who is the CFO and earns $250k per year. The ABC Company 401(k) Plan is top heavy. Fred is also employed by XYZ Company - completely unrelated to ABC Company - and participates in the XYZ Company 401(k) plan. In 2019 Fred had a $10,000 excess deferral - he contributed the IRS maximum in the XYZ Company 401(k) plan and $10,000 into the ABC Company 401(k) Plan. If the entire $10,000 that Fred contributed to the ABC Company 401(k) Plan is refunded as an excess deferral, is the ABC Company still required to make a top-heavy minimum contribution to non-key employees? My initial reaction is no, because an excess deferral is not an annual addition, but I can't find anything that would support this. I have colleagues that feel ABC Company is required to make a 3% top-heavy minimum contribution since Fred contributed 4% of his compensation to the plan even though the entire 4% is being refunded as an excess deferral. Again - they haven't provided anything to support their position either.

A participant’s salary-reduction agreement called for $961.54 per pay. The employer did this for all 26 pay periods, with no change to December’s last pay. The participant’s deferral limit for 2019 is $25,000 [$19,000 + $6,000 age 50]. Assume the employer/administrator is unwilling to use the plan’s provision for a return of a mistaken contribution. Must the plan’s administrator instruct the plan’s trustee to pay the participant a corrective distribution of $0.04? Is there any non-frivolous argument for treating this as so small that a correction is unnecessary?

Background: Client hired employee in January of 2017. Employee maxed out deferral with client (including catch up) in 401(k) plan for 2017. Employee also was paid the remaining portion of his 2016 compensation from former employer in 2017, and former employer withheld based on employee's 2016 deferral elections. Excess deferrals resulted. Correction will obviously not be done by April 15, 2018. Issue: What is the correct course of action in this situation? Set forth below are my basic thoughts: Code § 402(g)(1)-(2) and Reg. Sec. 1.402(g)-1(e)(2) clarify that, unless timely distributed, excess deferrals are (1) included in participant’s taxable income for the year contributed, and (2) taxed a second time when the deferrals are ultimately distributed from the plan. The excessive deferrals involved in the Error were not timely corrected because the April 15 deadline had already passed. Accordingly, the Error’s excessive deferrals must be taxed for the 2017 year (i.e. the year contributed) and again when the excessive deferral is distributed from the plan. If a corrective distribution is not made within the correction period discussed above, then excess deferral cannot be distributed until either (1) the distribution is otherwise permissible under the terms of the plan, or (2) the distribution is necessary to avoid plan disqualification under Code § 401(a)(30) (note: there is not a plan disqualification issue under Code § 401(a)(30) because the Error involves excessive deferrals between two unrelated plans and employers).[[1]] Reg. Sec. 1.402(g)-1(e)(8)(iii) allows for distributions of excess deferrals after the correction period to be distributed from 401(k) plan only when permitted under Code § 401(k)(2)(B). As discussed above, plan disqualification is not an issue; accordingly, I believe the error’s excessive deferral can only be distributed if permitted under the terms of the plan (i.e. termination, age 59 1/2, or other Code § 401(k)(2)(B) permissible times). I could be wrong on this analysis and this is my first go tackling this kind of problem so please let me know if I'm not on track and thank you for your help! [Update]: So a little twist on this analysis; the plan document states that the plan will return any excess deferrals by April 15th of next year, which obviously did not occur. So now it appears as though we do have a plan disqualification issue. Trying to find out the correct course now with this thrown in . [[1]] To elaborate on this point, under Code § 401(a)(30), if the excess deferrals aren't withdrawn by April 15, each affected plan of the employer is subject to disqualification and would need to go through EPCRS. However, in the situation involving the described error, the excess deferral amounts involve two unrelated plans with two separate employers. The IRS has stated on its website that “excess deferrals by a participant will not disqualify a plan if the excess is due to the aggregation of the participant’s deferrals to a plan maintained by an unrelated employer.” Accordingly, the fact that Error involves excessive deferrals among two unrelated plans/employers indemnifies the plans from experiencing a disqualifying event because of the Error.

Hello. I am new to 457 and hoping for some guidance. A tax exempt entity matches 457(b) deferrals. There is a vesting schedule causing the matching to vest and excess deferrals in years subsequent to the initial deferral. If the plan distributes the excess deferral after April 15, does this cause double taxation in a manner similar to the 401(k) plan treatment? My reading of the regulations and secondary materials suggest not. I can find nothing other than discussion relating to failure of the plan generally after April 15 and taxation of deferred amounts that are not subject to forfeiture. But if excess match is taxable in year vested and then distributed in subsequent year, how is it reported and is it taxable at distribution? Is there basis under sec. 72? A previous discussion and example were helpful but did not address matching and did not address specifics as to what is the effect of plan failure given late correction. Can someone provide an example with authority of reporting on W2 for an excess deferral caused by match vesting where distribution of excess is made in subsequent year after April 15? Thanks for any help you can provide.

I am having a difficult time decoding how to distribute a loss. We have an employee with a $1,000 excess deferral. (I am using round numbers for sake of ease). We need to return this deferral to him along with any allocable income. Our ERISA attorney states that 'income' means losses as well as gains. The $1,000 excess was returned via a negative contribution on the payroll account. The rationale was that the w-2 needed to diminish his deferral by $1,000. The $1,000 deferral he put into his account shrunk to $900 as of the date of return. This $900 was moved out of his account into what we call the negative account at the recordkeeper. My thought is to 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). Does this approach make sense?

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.