Tax reporting of return of excess deferrals for non calendar plan year

[dmb]

How is the return of excess deferrals for a plan year ending 6/30/2002 reported on the participant's Form 1040?? According to the 401k answer book they should be reported on the 2001 1040. does that mean that if the form has been filed the participant needs to amend the form or can the return be reported on the 2002 Form 1040??

[jaemmons]

Yes, and if they are not distributed by April 15th of the year following the year in which the excess occurred, they are taxed again in the year of distribution. In your case, if the excess deferrals are not paid by 4-15-02, they are taxed twice, both for 2001 and 2002. However, the allocable income is taxed in the year of actual distribution.

I hope we are talking about 402(g) violations and not ADP refunds.

[dmb]

I am talking about ADP refunds

[Brenda Wren]

Excess CONTRIBUTIONS (ADP refunds), not to be confused with excess deferrals which are 402(g) violations, are taxable to the participant in 2001 (the first year they could have been contributed). So yes, technically the participant is supposed to amend his personal tax return for 2001. But I can tell you that I have many clients that ignore this rule because of its stupidity and unnecessary extra work (in their opinion). They simply code the 1099-R with an "8" and move on. However, I do have a few clients that will follow the law and wait until 9/16 to distribute the refunds; pay the excise tax and thus avoid the problem with their employees.

[jaemmons]

Just a little caveat...If the total refund is $100 or less, then it is taxable in the year it is distributed and does not fall under the FIFO taxation.