Consequence of failing nondiscrimination

[Guest Frank Rizzo]

If the nondiscrimination requirements are violated and correction is not an option because it would be too expensive, what happens to the one EE who has been making contributions to a TDA for five years? Do we terminate the plan? How?

[mbozek]

See Thead on form 5500 requirements dated 11/15 for terminaton of a 403(B) plan. If plan provided for discriminatory contributions then the amounts deferred each year are taxable as income to the participant and the employer is liable for tax penalities for the failure to withhold income and fica tax. There may also be a 6% excise tax if the excess contributions were made to a mutual fund. The statute of limitations for collecting taxes from the employee is generally 3 years after the due date of the tax return for the year the contributions were made. However there is no s/l for the collection of taxes/penalities from the er for the failure to withhold taxes which were not paid by the employee. The employer can be liabile for 5 years worth of taxes, interest and penalities on the contributions made to the plan.

[david rigby]

http://benefitslink.com/boards/index.php?showtopic=17200