"ineligible" deferrals

[k man]

what is the proper way to handle the return of deferrals from a participant that was not eligible to make them. since it is after the april 15 deadline is it treated the same as a return of a deferrals in excess of the 402(g) limit?

[Blinky the 3-eyed Fish]

I would recommend reading Rev. Proc. 2003-44 for available self-correction options.

[Harwood]

If memory serves, this is one of those burning topics that the correction Rev. Proc. never deals with.

[Guest NiceGuyMike]

What I got from Rev. Proc. 2003-44 was that it is not considered proper to return the deferrals at all, but to amend the plan to allow that person in and go VCR. Therefore, tax treatment of returns wasn't an issue.

[k man]

i agree. the rev. proc says you should not return the deferrals but i think you could handle it like a 402(g) excess.

[Tom Poje]

thats true, the rev proc says amend plan to allow the ineligible and all other similar ees into the plan.

some people argue this is simply one option and that the rev proc also states the plan should be restored to a position as if the error had not occurred - hence refund deferrals plus gains.

its one of those tough calls. prior to the rev proc that allowed amending the plan (the ability to retro active amend is fairly recent), the general procedure was to refund the $

[k man]

next question- how would you report the distribution. i was thinking you would do it like a 402(g) but i am not sure.

[Harwood]

ERISA Outline Book: "many administrators have used code P, 8, or E so that the distribution appears to be one that is exempt from the penalty. We emphasize, however, that there is no authorization on Form 1099-R to do this, and the IRS has not provided any guidance to this effect."

[k man]

harwood, where is that in the erisa outlines?

[Harwood]

ERISA Outline Book 2004: page 15.542. Chapter 15 Section VI, Part B.6.f.(2)(d)

The "Problem Resolution Table" starting at page 15.601 [both 2001 and 2004 editions] is most useful.