Max deferral % of 15% exceeded during 2001

[alexa]

Our 401(k) plan has a maximum deferral % of 15%.

We have several employees who have deferred more than 15% of pay for 2001.

What suggestions do you have for this?

Thanks

[Archimage]

You must refund the excess deferrals plus any allocable income to the participant before April 15th.

[david rigby]

... and you should fix your payroll system to avoid this problem in the future.

[Guest SPOT]

Archimage,

Why April 15th? How do you 1099-R?

[Archimage]

Because that is what Treas. Reg 1.401(a)-30 says to do. It is includable in 2001's income so it must be distributed by April 15th. However, the income allocable to the corrective distribution is includable in 2002's gross income.

[Guest SPOT]

Isn't the applicable limit in 1.401(a)-30 referring to the 402(g) limit?. Would you really correct a plan imposed deferral limit in the same manner?

[actuarysmith]

Assuming that you are going to remove the cap anyway (due to EGTRRA), and assuming that allowing the 15% for 2001 does not result in any discrim or testing problems - Then, remember we are in the remedial amendment period.

Let them keep the 15% + in the plan for 2001 and correct the plan documentation to properly reflect.

[Archimage]

If you can't do that, the answer to your question is yes. You are not following the plan document so it could become a qualification issue.

[MWeddell]

This is a violation of the plan document, which the IRS regards as a disqualification problem. The correction should comply with Rev. Proc. 2001-17, most likely the Self-Correction Program portion if your client is eligible for it.

Retroactively amending the plan to raise the 15% limit probably won't work because the availability effectively was not available to all employees even if it now is amended to claim that it is. Probably refunds are in order to put the plan and participants in the position they would have been in if the error had not occurred.

[maverick]

Archimage:

We have a plan that let an employee under 21 make deferrals. They do not want to retroactively amend the minimum age/make a QNEC. Would the same procedures apply to returning the deferrals to the ineligible employee? Also, I've never been able to get an answer to this question: What code would be used on the 1099-R? I'm thinking 7 so the person would not have to pay the early dist penalty. Thanks. Maverick

[Archimage]

Yes. I would use the same procedures that MWeddell provided in his post. Unfortunately, I have never had to prepare 1099s so someone else will have to answer your question regarding this.

[Guest ndt123]

You report it as an excess annual addition per 2001-17.

[maverick]

That actually makes sense. Thanks ndt123.

Maverick