Which taxable year?

[Guest RONNIE WASEL]

Fiscal plan year ending 8/31/03, failed ADP test and has an HCE that must receive corrective distribution. This occurs before November 15th (3 1/2 months limit).

In what year would this distribution be taxable to participant?

Thanks.

[Mike Preston]

Without looking it up, if under $100, 2003, if over $100 2002 if more than that amount deferred in 2002.

This kind of silliness is why most will wait until after the three and 1/2 month period to return the excess and just pay the 10% excise tax.

[ccassetty]

Refunds of deferrals made within the 2 1/2 month deadline are taxable in the tax year in which the first deferrals were made for the plan year, so the answer in this case could be 2002 assuming the participant was making deferrals in 2002.

You didn't ask about match refunds, but note that the rules are different. Match refunds are taxed in the calendar year ending within the plan year. So, you could have an interesting situtation with an employee who didn't start making deferrals until 2003 having to receive separate 1099-Rs, one for 2003 for the deferrals and one for 2002 for the match.

There is an exception if the total of all deferral and matching contribution refunds totals less than $100 (excluding gains/losses) which allows the distribution to be taxed in the year in which it is refunded.

Of course, if the refunds are made after the 2 1/2 month deadline, all monies are taxed in the year the refund is made.

See Mike's suggestion to avoid the mess and wait until after the 2 1/2 month deadline.

[Mike Preston]

Yes, right. 2 and 1/2 month deadline.