Excess Annual Additions - 401(k) Refund?

[Medusa]

I seem to recall that at either an ASPA or EA conference pre-1999, something akin to the following was asked at the IRS Q & A session:

In the absence of regulations, how will the IRS define "reasonable error" for the purpose of 1.415-6(b)(6)?

The answer was something like "very loosely". I sure wish I could get my hands on that Q & A if anyone has it.

[Mike Preston]

Here's Q&A 20 from 1996, is this it?

QUESTION #20

§415 - Other: Reflecting Investment Loss in Corrective Distributions

If the section 415 annual addition rules are violated because of a reasonable error in determining the amount of elective deferrals that are permitted within the constraints of section 415, because of the allocation of forfeitures, because of a reasonable error in estimating a participant's compensation, or under other appropriate factors determined by the IRS, then a number of correction options become available under the section 415 regulations. One of these options is to distribute elective deferrals or after-tax employee contributions to the extent that the distribution would reduce the excess amounts in the participant's account pursuant to Reg. 1.415-6(b)(6)(iv). Prior to December 1994, the regulation stated that gains attributable to returned after-tax employee contributions would be counted as employee contributions if not distributed with the refunded contribution. The regulation did not state that this rule would apply to elective deferrals as well. Amendments to the regulation have now conformed the rule for elective deferrals to the rule for after-tax employee contributions.

The language of the 415 regulation is slightly different from the language of the section 401(k) and (m) regulations relative to corrections of excess contributions and excess aggregate contributions. Those regulations specifically call for the adjustment of the excess to reflect both gains and losses, while the 415 regulation merely mentions "gains". Should refunds made under the auspices of the 415 rules be adjusted for losses?

Also, is there a deadline for making the correction when using the 415 rule?

RESPONSE

It appears that there is no requirement to adjust for losses and it is unclear whether such an adjustment may be made.

There is no regulatory deadline for making the 415 correction. The expectation is that the correction should be made within a reasonable time after it is discovered. For example, the Service would not look favorably on a full year's delay in getting the correction made.

[Medusa]

Mike: No, that's not it, but thanks for the effort. The one I am thinking of ( and I am pretty sure it is from the same timeframe) said something to the effect that in reviewing refunds of deferrals due to excess annual additions, the IRS would not challenge the "reasonable error" issue, in the absence of regulations. I might have dreamt it but I don't think so.