Ineligible Elective Deferrals

[Guest CMC]

A plan failed to prohibit participants from making elective deferrals during the 12-month period following their hardship withdrawals. The preferred correction method is to refund the elective deferrals plus earnings and forfeit the matching contributions plus earnings. (See Q&A 21 in the Correction of Plan Defects column and Q 9:31 of Reish's Plan Correction Answer Book).

We're hoping to self-correct, and I'm trying to figure out how to implement this correction method with respect to former participants who terminated and took distributions of their mistaken deferrals.

I'd appreciate your thoughts on whether Section 6.05 of Rev. Proc. 2001-17 applies. That section provides that where an Excess Amount has been distributed, the Plan Sponsor must notify the recipient that the Excess Amount (a) was distributed and (B) was not eligible for tax-free rollover.

Whether Section 6.05 applies appears to turn on whether these ineligible elective deferrals are "Excess Amounts." The Rev. Proc. defines that term to mean:

* an Overpayment

* an elective deferral or employee after-tax contribution returned to satisfy 415

* an elective deferral in excess of the 402(g) limit that is distributed

* an excess contribution or excess aggregate contribution that is distributed to satisfy 401(k) or 401(m)

* an amount contributed on behalf of an employee that is in excess of the employee's benefit provided under a SEP

* an excess contribution that is distributed to satisfy 408(k)(6)(A)(iii)

* an elective deferral that is distributed to satisfy the limitation of 401(a)(17) or

* any similar amount that is required to be distributed in order to maintain plan qualification.

So, any thoughts about whether the ineligible elective deferrals are Excess Amounts? I'm thinking the "any similar amount that is required to be distributed" prong may capture them. Although they are no longer in the plan and therefore need not be distributed going forward to maintain qualification, if they were still in the plan they would need to be. And Section 6.05 seems to expressly contemplate that Excess Amounts may have already been distributed (i.e., that the mere fact that they have already been distributed won't keep them from being Excess Amounts).

I'd appreciate any thoughts you might have. Thanks in advance for your time.

[Guest Josh Hahn]

We have dealt with this situation before and we followed the prototype that you have laid out.