402(g) Limit

[Guest TimO]

Any thoughts are appreciated. I have a 401(k) client with a 4/1 plan year with a 15% cap on deferrals. In January, one of the plan participants deferred a large portion of her bonus, putting her over her 15% deferral limit for the plan year 4/1/02 -- 3/31/03. As a result, the sponsor returned a portion of her deferrals as a plan limit excess.

The issue now is -- the third party payroll company will not let this participant defer any more for the 2003 calendar year because she has reached her $12,000 limit. It is my position that since she had a portion of the deferrals returned in May as plan limit excesses, she may now continue to defer until she reaches a net limit of $12,000.

I want to be able to point the payroll company to a cite or authority that this participant may net at $12,000, or, perhaps I am incorrect?

Any direction would be great.

[Guest Kevin A. Wiggins]

Under Code Section 402(g)(3)(A), any amount included in the employee's gross income for a taxable year is not an "elective deferral" for that year. It seems to me if the employee was taxed in 2003 on the distributed amounts, such amounts do not apply to her "elective deferral" limit for the year.

[Tom Poje]

for possible cite I would read

ERISA Outline Book 2003 edition, 11.250 - 11.252 for a good discussion on the coordination of excess deferrals / excess contributions. noncalendar years are discussed

[Guest TimO]

Thanks Kevin and Tom.

I checked out the Outline section you referred to, and it appears as though if this had been an ADP excess, she would not be allowed to reduce her deferral amount for 2003 by the corrective distribution amount? However, the regs never seem to address plan limit excess. At any rate, this is good stuff and thanks for the replies.

I am not sure if this payroll company is worried about liability for allowing someone to "exceed" the limit, or (more likely) if it is simply a system limitation on their end.

Oh well, thanks again.