Losses on Corrective Distributions

[DTH]

This always confuses everyone!!

IRS Notice 89-32 and Form 1099-R instructions are clear that if you distribute a loss on a 402(g) excess deferral that the taxpayer may include the loss on Line 21 of Form 1040.

Example: $1000 excess deferral, $100 loss, check for $900. Tax report $1000 as taxable in 1099-R and inform the taxpayer about the loss in a letter or as an *in the blank box on the 1099-R.

How are you handling ADP/ACP excesses? Does the taxpayer eat the loss, as they would do with a regular distribution? I am having a problem with not allowing the loss reduction on ADP excess (K) contributions where the IRS allows it for excess (K) deferrals.

Example: $2,000 ADP excess contribution, $200 loss. Would you tax report like the excess deferral - $2,000 taxable or $1800??

I'm assuming the latter.

Thanks!:confused: :confused:

[kocak]

For excess contributions, I've only ever reported the net refund as income to the participant.

Michele

[DTH]

Have you been reporting the net amount for the excess deferral too? In other words, using my example, do you tax report the $900 as gross and taxable on Form 1099-R, provide a letter to the participant indicating they must report $1000 as income on the 1040 and the $100 loss as a bracketed amount on on line 21??

[kocak]

I do the same thing you do for excess deferrals.

Assuming a 2002 calendar year plan.

Excess deferrals returned by 4/15/03 are taxed in the year of deferral. They can be returned in 2002 or 2003. Earnings on the excess are taxed in the year of distribution.

Excess contributions returned by 3/15/03 are taxed in 2002 (unless the de minimus <$100 rule applies). These can not be returned before 1/1/03. The earnings are also taxed in 2002. Which is why I show a net return on the 1099-R.

So... earnings on excess deferrals are taxed in the year of distribution, which may be different than the year the excess deferrals are taxable, but earnings on excess contributions are taxed in the same year the excess contributions are taxable.

michele