reporting excess annual additions

[Guest agordon]

Hi -

If HCEs rec'd distributions from plan in March, 2003 for excess annual additions, when is that taxable to them, 2002 or 2003?

I thought that it would be taxable for 2002; the 1099R would be issued for 2003 because that's the year the distribution was actually made, but the HCE would have included it in their 2002 tax return. Is this correct?

thanks for your help!

[Theresa Lynn]

According to Revenue Procedure 92-93, section 3.02, employee deferrals are taxable in the year received (and employee contributions of course are not taxable in any event).

(Rev. Proc. 92-93, 1992-2 CB 505)

Excerpt:

3. TREATMENT OF THE DISTRIBUTION OF ELECTIVE DEFERRALS

01 The distribution of elective deferrals pursuant to section 1.415-6(b)(6)(iv) is a corrective disbursement rather than a distribution of accrued benefits. Thus, it is analogous to distributions under sections 401(k)(8) (distribution of excess contributions), 401(m)(6) (distribution of excess aggregate contributions), and 402(g) (distributions of excess deferrals). As with those distributions, it is inconsistent with the purpose of the regulations to subject this distribution to the spousal consent rules of section 417 of the Code, the requirements of section 72 of the Code, and various other sections governing distributions of accrued benefits. Thus, a distribution pursuant to section 1.415-6(b)(6)(iv) will generally be treated as a corrective disbursement rather than a distribution of accrued benefits. The subsections below describe the treatment of such distributions for certain tax and reporting purposes. However, for ease of administration, distributions under this section will be reported to plan participants and the Internal Revenue Service in the same manner as distributions of accrued benefits (see section 5 of this revenue procedure).

02 The distribution is includible in income in the year distributed. No part of the distribution may be treated as a return of investment in the contract under section 72. The amount distributed is not subject to the additional tax on early distributions under section 72(t) and is not treated as a distribution for purposes of applying the excise tax under section 4980A.

03 The distribution is not wages for the purposes of the Federal Insurance Contributions Act or the Federal Unemployment Tax Act.

04 No notice or consent is required under sections 411(a)(11) and 417 with respect to the distribution.

05 The distribution may be made without regard to the restrictions on distributions under section 401(k)(2)(B)(i).

06 The withholding requirements of section 3405 of the Code apply to the portion of the distribution that is includible in income.

07 The distribution may not be treated as a required distribution for purposes of section 401(a)(9).

08 The distribution is not an eligible rollover distribution within the meaning of section 402©(4), as amended by the Unemployment Compensation Amendments of 1992.

4. TREATMENT OF THE RETURN OF EMPLOYEE CONTRIBUTIONS

01 Like the distribution of elective deferrals under section 1.415-6(b)(6)(iv), distribution of employee contributions to correct an excess annual addition is treated as a corrective disbursement. Thus, many of the requirements governing normal p1an distributions do not apply to the distribution of employee contributions pursuant to section 1.415-6(b)(6)(iv).

02 Employee contributions returned as excess annual additions pursuant to section 1.415-6(b)(6)(iv) are not includible in gross income, and are not included in the employee's investment in the contract.

03 Allocable gains distributed pursuant to section 1.415- 6(b)(6)(iv) are includible in income in the year distributed. They may not be treated as including any return of investment in the contract.

04 The distribution is not subject to the additional tax on early distributions under section 72(t) of the Code and is not treated as a distribution for purposes of applying the excise tax under section 4980A.

05 The distribution is not wages for the purposes of the Federal Insurance Contributions Act or the Federal Unemployment Tax Act.

06 No notice or consent is required under sections 411(a)(11) and 417 with respect to the distribution.

07 The withholding requirements of section 3405 of the Code apply to the distribution.

08 The distribution may not be treated as a required distribution for purposes of section 401(a)(9).

09 The distribution is not an eligible rollover distribution within the meaning of section 402©(4), as amended by the Unemployment Compensation Amendments of 1992.

5. REPORTING REQUIREMENTS FOR 415 ELECTIVE DEFERRALS

01 A distribution of elective deferrals from a plan pursuant to section 1.415-6(b)(6)(iv) is reported on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

02 A separate Form 1099-R must be used to report this distribution. In general, no other distribution may be reported with this distribution (including a distribution of excess deferrals, excess contributions or excess aggregate contributions). However, a distribution of employee contributions and allocable gains pursuant to section 1.415-6(b)(6)(iv) may be reported with this distribution. See section 6 of this revenue procedure for instructions on the reporting of such a distribution.

03 Box 1 and Box 2a of the Form 1099-R should each show the total amount of the distribution. Box 2b of the form may not be used for reporting a distribution pursuant to section 1.415-6(b)(6)(iv). Box 5 of the form should be left blank (unless the distribution is being reported with a distribution of employee contributions pursuant to section 1.415-6(b)(6)(iv)). Box 7 should show a Code E.

04 The distribution should be included under “Total Pensions and Annuities” on Form 1040 or Form 1040A.

[Harwood]

Read the 1099-R instructions carefully.

The amount of the distribution may come into play.