402g refunds?

[Guest KD40]

If a 12/31/2002 plan has 402g refunds, do those need to be issued prior to 12/31/2003? Since these are an individual's refund and not a plan refund, I was unsure on whether those could be treated differently.

Thanks.

[Tom Poje]

interestingly enough, read the regs 1.402(g)-1(e)(4), the last sentence

...A plan need not permit distribution of excess deferrals.!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

In fact, what if your document doesn't permit it!

However 1.401(a)-30 says 'see 1.402(g)-1(e) for rules permitting the distribution of excess deferrals to prevent disqualification of a plan or trust for failure to comply in operation with section 401(a)(30)'

Assuming the language is in the document, the failure to do so would be a violation of the terms of the document, so eventually you simply refund the $.

The drawback of course is that the ee gets taxed in 2002 for excess deferrels (his W-2 statement would prove this) and he will get taxed again in the year the distribution actually takes place. The self correction rules allow for distribution of excess deferrals, so even if you are 'late', they still can be done.

[Guest jjenkins]

If the excess deferral refund was processed today (12/29/03) for the 2002 402(g) excess, how would this be reported on Form 1099R?

Sal addresses this in the ERISA Outline Book, but provides no citation. (he says only one 1099R).

Does anyone know of a cite which would provide support for just one 1099R?

[Tom Poje]

I think it is simply in the 1099-r instructions which says

'corrective distributions of an excess plus earnings are reportable on form 1099-r for the year of the distribution regardless of when the distribution is taxable to the participant.' thus, one 1099-r in the year of distribution.

the double whammy is in the instructions says

...if the distribution occurs after April 15, the excess is taxable in the year of deferral AND the year of distribution.

[mbozek]

Arent there two different types of excess contributions. Under IRC 401(a)(30) the maximum salary deferral from all plans maintained by employers in the same controlled group cannot exceed the annual limit, e.g., 12,000 in 2003. Under 402(g) the amount that an individual can defer from all plans, whether or not in the same controlled group, is limited to 12,000. By following the rules for 402(g), the refund of contributions which exceed the 401(a)(30) maximum by April 15th of the following year will avoid plan disqualification. Reg. 1.402(g)-1(e)(1).

However, if an individual has contributed to 2 or more salary deferral plans of unrelated employers where the total deferral exceeds the annual limit, e.g., 8,000 to a 401(k) plan and 6,000 to a 403(b) plan, there is no requirement that either plan make a refund because only the participant will be taxed on the excess deferrals. The participant may request that the excess amount be removed and if the refund is made by April 15th the amount is only taxed as income in the year it was contributed and is not subject to the 10% penalty tax of 72(t). Reg. 1.402(g)-1(e)(8). Corrective distributions made after April 15th are taxed again as a taxable distribution and are subject to the 10% penalty of IRC 72(t) but the 401(k) plan's qualified status is not affected since the annual limit for the plan has not been exceeded. Also a distribution of excess deferrals cannot be made after April 15th of the following year unless there is a distribution event permitted for a 401(k) plan. Reg. 1.401(g)-1(e)(8)(iii).

I have never seen a 401(k) plan that did not automatically provide for a refund of amounts that exceed the the 401(a)(30) limit to avoid a disqualfication of the plan.