Correction of Excess Deferrals in 457 Plan

[chris]

Is there any correction procedure such as EPCRS for 401(a), 403(B) and SEP's for dealing with excess deferrals in a 457 plan? It doesn't appear that EPCRS would apply to a 457 Plan. Is it just a matter of distributing the excess deferrals and adding the amounts to the participants' W-2's? The employer is a non-profit healthcare organization which maintains a 457 and a 401(k). It just recently found out that a number of participants have exceeded the 457(B) limit for a number of years. Is there anything from the plan side with respect to the IRS' overseeing the correction to insure qualification is maintained?

[chris]

Update regarding the previous post...... Looks like the fact that the deferral limits were exceeded won't necessarily cause the entire plan to be disqualified (or treated under 457(f)) based on Senate Comm. Reports re TAMRA '88. In other words, since the plan contained the deferral limits within the plan document, the fact that such were exceeded won't cause the entire plan to be treated as an "ineligible plan". However, the participant who exceeded the limits will be taxable on the excess deferrals. Is it just a matter of issuing corrected W-2's for the excess?? Since 457 does not provide for distribution of such excess, I am assuming that the excess amounts will need to remain in the plan. Would that present a double tax effect upon distribution or would the employee simply need to show that the excess was included in income under a corrected W-2 and thereby be able to apply that basis to the dsitribution received??? Anyone dealt with this before????? Thanks for any help.

[Carol V. Calhoun]

It is not clear that corrected W-2s need to be issued. See Technical Advice Memorandum 199903032, in which the IRS held that although accruals under plan would be includible in the participants' income under section 457(f), they would not be included in wages for withholding purposes before the participant actually received them. Of course, this seems to create a big mismatch between income tax withholding/W-2 reporting and personal income taxes.

[chris]

Based on informal guidance from the IRS re excess deferrals, the excess and any income thereon would need to be distributed. The distribution event issue aside, it would seem that corrected W-2's would need to be issued for the years in question given that the excesses were taxable in the year made. When I asked the IRS personnel as to how to handle multiple year excess deferrals the response I got was that a "tricky question..." Any insight would be appreciated.....thanks or your help.

[Carol V. Calhoun]

Why would corrected Forms W-2 need to be issued, if the amount is not (under the technical advice memorandum) treated as part of "wages" for reporting or withholding purposes?