Distribution of excess deferrals after correction period

[J. Bringhurst]

Pursuant to §1.402(g)-1(e)(8)(iii), distributions of excess deferrals made after the 2½ month correction period may only be distributed when permitted under §401(k)(2)(B) (i.e., severance from employment, death or disability; attainment of age 59½, hardship, termination of plan).

I do not see this stated anywhere under Appendix A of Revenue Procedure 2002-47, which merely provides that the permitted correction method is to distribute the excess deferral to the employee and to report the amount as taxable in the year of deferral and the year distributed.

Any thoughts on this?

[austin3515]

If the IRS says its okay, then its okay, right?

There are a lot of methods not included in the regulations that are set forth in 2002-47. In fact, if those correction methods were in the regs, we wouldn't need 2002-47.

Just a thought...

[Steve72]

Splitting hairs, but 2002-47 doesn't say to distribute the excess deferrals immediately. Since the Reg gives guidance on the date of distribution, and the Rev.Proc. does not, I would go with the Reg.

i.e., report the excess deferral as taxable in the year contributed, and again when distributed upon the occurrence of a distributable event.

[Brian Gallagher]

don't excess deferrals have to be out by April 15 of the calendar year, rather than 2 1/2 months after the plan year?

[J. Bringhurst]

Brian,

You are correct...I was also looking at ADP/ACP testing and conflated the two correction periods.

Sorry for any confusion!

[Brian Gallagher]

at my firm, we've never ran into trouble distributing adp/acp excesses after 2 1/2 mos.

[J. Bringhurst]

My problem concerns distributing excess deferrals (deferrals in excess of 402(g) limit) after the applicable correction period (April 15) not distributing excess contributions under ADP after the applicable correction period.

[R. Butler]

Did the excess occur as the result of deferrals in one plan or is the employee a participant in multiple unrelated plans?

If employee only participates in one Plan you can distribute. Since after 4/15 participant is taxed in both year of excess and year of distribution.

If employee participates in two plans and in the aggregate deferrals exceeded 402(g), generally you don't distribute until there is a distributable event. The double taxation will still apply.

[Brian Gallagher]

Below is Sec 402(g). See part A(ii). It says distributions are made notwithstanding other provision of law...meaning to heck with 401(k) (2) (B)!!

Limitation on exclusion for elective deferrals

(1)

In general

Notwithstanding subsections (e)(3) and (h)(1)(B), the elective deferrals of any individual for any taxable year shall be included in such individual's gross income to the extent the amount of such deferrals for the taxable year exceeds $7,000.

(2)

Distribution of excess deferrals

(A)

In general

If any amount (hereinafter in this paragraph referred to as ''excess deferrals'') is included in the gross income of an individual under paragraph (1) for any taxable year -

(i)

not later than the 1st March 1 following the close of the taxable year, the individual may allocate the amount of such excess deferrals among the plans under which the deferrals were made and may notify each such plan of the portion allocated to it, and

(ii)

not later than the 1st April 15 following the close of the taxable year, each such plan may distribute to the individual the amount allocated to it under clause (i) (and any income allocable to such amount). The distribution described in clause (ii) may be made notwithstanding any other provision of law.

[RTK]

However, it looks like (A)(ii) distribution must be made by April 15th though.

[J. Bringhurst]

§1.402(g)-1(e)(8)(iii) appears to indicate that distributions after April 15 must wait for a distributable event.

[R. Butler]

If employee participates only in the one plan you distribute, otherwise you have an operational failure because I am pretty sure your document limits deferrals to the 402(g) limit. See the Q&A linked below.

http://www.benefitslink.com/cgi-bin/qa.cgi...id=66&mode=read

[J. Bringhurst]

Thanks for that link!

[Brian Gallagher]

it seems that you would indeed need a distributable event. my firm distributes them after april 15th all the time. maybe we should revisit our procedures.

[R. Butler]

I won't belabor the point anymore after this, but if the excess arises from deferrals made to only one Plan, that Plan can distribute the excess after 4/15. The Plan has to distribute the excess or it has an operational failure that can disqualify the Plan. In addition to the link in my previous post see the Rev. Proc. cited in J. Bringhurts's intial post.

[J. Bringhurst]

Yes, the excess is from deferrals to only one plan. Thanks for the help!

[Brian Gallagher]

i thought regs took precedence over rev proc's. the regs seem to say if the x/s is not out by 4/15, it can't come out until a distributable event.

[J. Bringhurst]

Well, it seems as if there is no clear cut answer on this one...I may have to go to the IRS and inquire (without disclosing the client, of course). If they give me an answer, I'll post it here.

[R. Butler]

The regs don't contemplate a 402(g) excess in a single plan, because it shouldn't happen in a single plan scenario (although we know there are occassions where stuff happens).

The regs contemplate 402(g) excess due to participation in multiple unrelated plans. In such a scenario, it is likely that neither plan has an operational failure.

[Brian Gallagher]

Please see question #'s 66, 67 & 68 in the "Correcting Plan Defects" secion of Q & A columns. (I'm no good at inserting links into messages; sorry).

It seems that the excesses need to be removed before a distributable event because there is an operational defect if someone has violated the 402g limit. you will have to go thru one of the correction programs, too.