403(b)(7) Excess Deferral

[Guest RPSS]

How are 403(B)(7) excess deferrals corrected? How should the correction be reported by the custodian? Does the employer need to amend any reporting like the W-2?

[Guest mike webb]

Excess Deferrals (defined as elective deferrals in excess of the 402(g) limit-- $10,000 in 1999, $10,500 in 2000)to a 403(B)(7) custodial acount are treated in a similar fashion to 403(B)(1) annuity excesses. The excess deferral (and earnings on the excess) must be distributed by April 15th of the tax year following the excess (April 15, 2000 for 1999 excesses) or the individual's custodial account could be subject to the loss of 403(B) status, beginning with the year of the excess. The excess is taxable in the year of contribution, while the earnings are taxable in the year of receipt. Thus if the particpant already filed his/her income tax return for 1999 (fortunately, an unlikely event at this point), then he/she would have to file an amended return to reflect the excess deferral as additional taxable income. Note that the particpant's W-2 is unaffected; the vendor will issue two Form 1099s to reflect the excess deferral and earnings. The participant will typically receive the 1099s after the close of the year of distribution (beginning of 2001, for 1999 excesses). The 1099s are specifically coded to reflect income inclusion in the appropriate years.

If the 403(B) arrangement is subject to ERISA, the employer typically notifies the custodian of the excess deferral; the custodian typically calculates the earnings and issues a check and the appropriate 1099's to the particpant (see above). The procedure is the same for Non-ERISA arrangements, except it is the particpant who must request the return of the excess.

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Mike W.

[Carol V. Calhoun]

The one difference between 403(B)(7) contracts and 403(B) annuity contracts is that excess contributions to 403(B)(7) contracts may trigger the excise tax under I.R.C. § 4973, if they exceed the maximum exclusion allowance and/or the section 415 limitation (as opposed to just the 402(g) limitation).

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