402(g) excess deferral not refunded by April 15

[Guest GMedley]

We have a plan which had a 402(g) excess (of $36) for 2000 which was not refunded by April 15th. According to Revenue Procedure 2001-17 Appendix A, we need to distribute this amount back to the participant & tax him on this amount both in the year deferred AND the year distributed.

I believe this is a new rule & one we have not encountered before. I wonder if anyone else has had to do this. How would you code your 1099R? Would you send two? Also, traditionally earnings were taxed in the year distributed. Would these also be double taxed? What if they were negative?

I think I'll issue two 1099Rs & ignore the 69 cents of negative earnings in this instance, but I'd appreciate any feedback.

thanks,

Grant

[R. Butler]

It sounds to me like you understand the rules.

If distributed by by 4/15 of the year following the year of deferral, the excess is taxable in the year of deferral. If distributed after 4/15, the excess is taxable in both the year of deferral and the year distributed. Earnings are always taxed only in the year in the year distributed.

In your scenario, you will issue 2 1099-R's. Be sure to use the correct code in Box 7 (I think Box 7) to designate the correct taxable year.

Now I assume that the excess deferrals are in fact distributable (i.e., result from deferrals to one plan; if the excess results from deferrals to plans of unrelated employers, that timely notice given, etc.).

[M R Bernardin]

It is my understanding that the means of including this excess deferral in income for the year of the deferral is a W-2 item, not a 1099 item. The employer should issue a revised W-2 or perhaps the employee simply increases the taxable income reported for the year based on the W-2 that was issued. Of course, an amended 1040 would be required. Only one 1099 would be issued, showing the amount distributed, which is taxable in the year distributed as are any earnings. Keep in mind that if there is no distributable event allowing distribution of the excess at this point, EPCRS may need to be used to get the excess out of the plan.

[Tom Poje]

I think you are correct in regards to the 1099, except no new W-2 gets issued. remember, the amount of derrals is reported on the w-2. so if you work for a number of companies, the govt can (and I imagine they do) add up the deferrals from all w-2s. if it shoots above 10,500 I have to believe it red flags it or something. Its up to the filer to claim it somewhere on the tax form, hence getting taxed that year, and then again when they receive the actual distribution.

double taxation! what a scheme.

[R. Butler]

I would refer you to the 1099-R instructions. You can get it off the IRS web site. Pages R-3 and R-8 are pretty clear on how to handle this situation. Also page R-4 will tell you how to handle any loss.

[Guest GMedley]

Thanks for this info. The 1099R instructions were helpful. I don't know that I follow the comments about whether this 402(g) excess is distributable. Are we not obliged to distribute this excess back to the participant? Do we need some other sort of distributable event? Or does the plan document need to have some language in it regarding these distributions?

thanks.

[M R Bernardin]

I'm not sure what in the 1099-R instructions is leading you to believe you issue two 1099's in this situation. A 1099 is issued only when a distribution is made from the plan. The instructions state that if an excess deferral is returned prior to the 4/15 deadline, then the earnings are taxable in the year distributed and the deferral is taxable in the year deferred. The instructions further state that "if the excess and the earnings are taxable in two different years, you must issue two Forms 1099-R to designate the year each is taxable." Thus, if the excess was refunded by the 4/15 deadline, two 1099's would be issued. In this situation, however, the 4/15 deadline was missed, so whenever the excess is distributed, from a 1099 reporting perspective, only one 1099 will be issued because both the distribution and the earnings will be taxable in the year distributed. The deferrals are taxable in the year made as well, but not because they were distributed from the plan but rather because they were not distributed by the 4/15 deadline. The reporting of the excess deferral as taxable income for the year of the deferral is, IMHO, accomplished by the participant including the excess on her 1040, not by the issuance of another 1099.

[R. Butler]

Oops. I believe M R Bernardin's most recent analysis is correct and that my initial post is wrong. Only 1 1099-R is required in the scenario prsented. I was careless; I will be more careful in the future.