Excess Contribution Reporting

[Guest hruser]

Our 401(k) Plan failed the ADP test for pye 12/31/2003 and we are making refunds of excess contributions to some of our HCE's. These refunds will be made by the end of February. I am getting questions from the employees regarding how to report this on their 2003 income tax returns. I know that they must include the amount of the refund in their taxable income for 2003.

Do they just adjust the amount they report on the line for "wages, salaries, tips, etc."?

Do they change the amount of deferrals they report or do they still report the deferrals indicated on their W2?

Thank you for any guidance!

[Harwood]

As always, participants need to check with their tax advisors. What follows are excerpts only:

Form 1040 Instructions

Line 7 Wages, Salaries, Tips, etc.

• Corrective distributions shown on Form 1099-R of (a) excess salary deferrals plus earnings and (b) excess contributions plus earnings to a retirement plan.

Publication 525 Taxable and Nontaxable Income

Excess Contributions

You must include the excess contributions in your income as wages on line 7 of Form 1040. You cannot use Form 1040A or Form 1040EZ to report excess contribution amounts.

If you receive excess contributions from a 401(k) plan and any income earned on the contributions within 2 1/2 months after the close of the plan year, you must include them in your income in the year of the contribution. If you receive them later, or receive less than $100 excess contributions, include the excess contributions and earnings in your income in the year distributed.

You should receive a Form 1099–R for the year in which the excess contributions are distributed to you (or are recharacterized). Add excess contributions or earnings shown on Form 1099–R for 2003 to your wages on your 2003 tax return if code “8” is in box 7. If code “P” or “D” is in box 7, you may have to file an amended 2002 or 2001 return on Form 1040X to add the excess contributions or earnings to your wages in the year of the contribution.