402(g) oops

[Guest LWilson]

Here it is June . . . I am modifying the statement design for a plan, and in testing the statement I come across a participant who deferred $10,710 during 2001! How could I have missed this! Fortunately, about $220 came in at the beginning of the 2002 plan year.

At least I hope that's fortunate . . . can deferrals be recharacterized for the new plan year?

[david rigby]

What do you mean "... came in at the beginning of the 2002 year" ? Was that a deduction from a paycheck dated in 2001?

[JanetM]

What amount was listed on W-2?

[R. Butler]

The amount cannot be reclassified, it must be distributed. Since it is after 4/15, the entire distribution will be taxable in 2002. In addition the participant should not have excluded the excess from income in 2001. See 402(g)-1(e)(8).

[Guest LWilson]

It was definitely part of his 2001 income. I was afraid recharacterization wasn't available for 401(k), even if the money hit the Trust during 2002, but I thought I'd double check. Oh bummer.

[Tom Poje]

in other words, the following happens:

the IRS looks at the w-2 on the 1040 and sees too much in deferral. the individual will be taxed in 2001. that is kind of hard to hide from the IRS, whether the individual claimed it or not.

you give him a distribution in 2002. he will be taxed again on the money when he files his 2002 taxes! 2 times on the same amount!

gotta love it!

[Guest LWilson]

Let me throw a wrench in the works . . . this is an "off" plan year . . . March 1 through February 28. Let's suppose our 402(g) limit is within limits for the calendar year, but for the fiscal year we're over by $210 . . .

1. 402(g) is calendar year, correct, so we'd be fine? Should we be testing ADP on a calendar year basis as well?

2. If ADP is tested on plan year, but 402(g) is calendar, then what amount should I use in the test . . . the 10,500 plus the excess?

Let me use this time to ask a procedural question as well . . . I'm still waiting to hear from the employer about what deferrals came to for the calendar year . . .

Let's suppose the 402(g) limit is exceeded for the calendar year, and we've got to return this guy's money + or - gains & losses . . .

I'd like to give the employer step by step instructions for correction because they are a rather handsy holdsy client . . .

1. Do they need to modify the person's W-2 immediately, and instruct him to refile his personal income taxes? Should we do a 1099 instead?

2. What about their 944s, etc. Does the employer need to make revisions there? What about their corporate return? Our deductible amount has been reduced.

Has anyone been through the process of instructing the employer? Help!

Thanks.

3.

[R. Butler]

1. ADP done on plan year basis.

2. If Person is an HCE include the excess deferral in the ADP test, if NHCE do not include. If Person is an HCE and later gets a refund due to a failed test. The amount of that refund can be reduce by the 402(g) excess distributed.

3. I am fairly certain the W-2 is not amended. A 1099-R should be issued for the distribution.

I am not sure about the issues concerning the corporate return.