Tax treatment of correction

[J. Bringhurst]

A client mistakenly took elective deferrals from severance payments for several participants in its 401(k) plan. The account balances for the affected participants have since been rolled over to either IRAs or other qualified plans. Beyond informing the recipient plan or arrangement of the ineligible rollover, what is the tax treatment of the corrective distribution? Is the participant sent a current 1099R for the corrective distribution or is he sent a corrected W-2 for the year the deferral should have been paid in cash?

[mbozek]

If the 1099 -R is revised to indicate the reduction for ineligible contributions then the participant will be deemed to have made excess contributions to the IRA which will be subject to the 6% excise tax. The amount will be taxed each year until the excess is removed. The w-2 would indicate the amount of the severance payments mistakenly put into the plan as additional wages for which withholding is required. I dont know how the fica tax will be paid. Presumably the employer will pay the employee's share.