Corrective Distribution - Ineligible Deferrals

lkpittman · August 27, 2001

An employee was allowed to defer in 2000, but employer discovered later that she was not eligible. I understand that correction of this insignificant operational defect should be distribution of the deferral, plus applicable earnings. What about losses? The deferral amount was only $276, so if losses are taken into account, the amount to be distributed won't be much. Also, does the employer issue a 1099-R for 2001, or is the $ taxable in 2000, and, if so, how reported?

I'm sure this has been covered before, but my search isn't turning up anything on point. Thanks for any help.

August 30, 2001

With respect to the loss issue, the general provisions of EPCRS under Rev. Proc. 2001-17 do cover this (both in the section regarding correction procedures as well as in Schedule B dealing with earnings adjustment methods).

Section 6.02(4)(a) provides that corrective allocations (query whether this also covers corrective distributions since the heading of the Section applies to allocations and distributions) should be made in accordance with the terms of the plan at the time of the failure and should be adjusted for earnings (INCLUDING LOSSES) and forfeitures that would have been allocated to the participant’s account if the failure had not occurred. Appendix B provides that a contribution of earnings is made from the date of the failure up until the date that the correction is made. Section 3.01(2)(a).

Section 6.02(4)(a) of Rev. Proc. 2001-17 goes on to say that “the corrective allocation need NOT be adjusted for losses.” Of course, I'm assuming you wouldn't use this alternative.