402(g) limitation violation due to 2 plans

[Fred Payne]

Participant Jones just now informed us that in Plan Year 2001, he deferred $4,000 in excess of his 402(g) limitation due to deferrals he made in the 401(k) plan and 401(B) plan respectively of two separate employers. Since the Plan we administer paid no match, he wishes to make the corrective distribution from our Client's 401(k) Plan. (Our Client's Plan is a 401(k) Safe Harbor using the 3% SHNEC so there's no ADP or ACP issues for us to deal with.)

Assume we make the distribution yet here in 2002, adjusted for gains/losses.

Anything special we must do with the 1099 to indicate that, one, the 402(g) violation was in year 2001; and two, the problem is the Participant's and not the Plan's violation?

The Plan pays no excise tax. Correct?

Participant handles his penalties for excess contributions on his 1040. Correct?

Thanks.

[actuarysmith]

Fred-

I think you are right on the employer paying no penality. It is not a plan level problem, it is the participant.

I had this happen a year or two back. Check your plan doc - the corbel document (and probably the code and/or regs) say that the distribution from the plan needed to occur by 3/15 or 4/15/02.

My recollection is that if it has not been completed within that time frame, the participant must leave it in the plan AND IT IS STILL TAXABLE.

They are then taxed on it a second time around when they actually have a distributable event and take a distribution from the plan.

[Guest Bud]

Actuarysmith is right. It's taxed twice and it should be a disqualifying defect to the plan.

[mbozek]

Bud: What is your authority for plan disqualification where the participant exceeds the 402(g) limit by contributing to plans of two unrelated employers? As I understand IRC 401(a)(30), the employee's contributions to all plans maintined by an emplyer cannot exceed 11,000. However if the employee exceeds the 402(g) limit by contributing to the plans of two separate employers then the employee gets a w-2 showing the amount of the contributions and can request a refund from one plan to prevent double taxation by electing the refund procedure under IRC 402)g)(2). There is no disqualfication to the plan because there are no excess contributions.

[Guest Bud]

You're right. I forgot the word "not" in my last sentence. It should NOT be a disqualifying defect. I shouldn't have the authority to type and submit without reading my message first.

[Fred Payne]

Now that the disqualifying issue is cleared up, what about actuarysmith's statement that since it is now past 4/15, the distribution of the year 2001 excess should NOT be distributed?

[actuarysmith]

I checked the specific language in the corbel prototype.

Page 58 - 12.2(e) if a participant has Excess Deferrals for the taxable year, ......, the participant may, not later than March 1st following the closw of such taxable year, notify the plan admininistrator in writing of such excess and request............

In such event, the Administrator shall direct the distribution of such excess amount not later than the first April 15th following the close of the participants taxable year. etc.

This language clears up several things-

1) it is the participants responsibility to notify the Administrator by March 1st (in writing)

2) the distribution must occur not later than April 15th.

The passage goes on to state that any distribution of less then the entire amount of excess deferrals and income shall be treated as a distribution from the plan (even though not actually made).

[mbozek]

yeah- thats the statutory requirement under 402(g). The excess payment is taxed in the year of deferral and again at distribution as provided under the plan.