Was I wrong?

[goldtpa]

Client gave me w-2s for 2003. One of the HCEs had 2 w-2s. When I added them together the 401(k) contribution was $15 over the limit. I told them to refund the $15 to the HCE.

Then I found out that they had withheld money from the employees paychecks, that was never sent to the mutual fund. The $15 over contribution was part of the money that was withheld but never contributed. I told them to go to the VFCP or self correct using the method set forth by the VFCP.

They found another TPA do do the work. He/she gave them a different answer. Don't know what that answer was. Was I wrong in my advice? If I was please let me know so I don't make the same miztake twice.

[Tom Poje]

well, when the guy filed his taxes for 2003, he would submit thw two w-2s and the govt would know he over deferred. (ooooh. big penalty on $15) but regardless the IRS will know.

In addition, when he takes a distribution, he will be taxed again. same deal, you aren't talking about a lot of money at that point. though I guess if the $ never get deposited then that wouldn't happen.

If this is only one plan you are talking, then there is always the possibility of disqualification.

The extra $15 was not deposited, so that is like a loan to the company, a prohibited transaction. In fact, what happened to the $15? If it was simply given back to the employee, then I like that scheme. I will defer and have the employer give me back the $ under the table and I avoid taxes.

Interestingly enough, if the situation is remedied 12 months after plan year end then the $15 would count as a nonelective contribution, and if no other nonelectives were made, then you fail coverage as well.

my understanding would be that the extra $15 should still be deposited and then distributed back to the HCE.

Now, would the IRS fight over $15? The self correction program implies you don't have to worry about a corrective distribution if it is under $50, so I doubt it. On the other hand, the fact that the $ were not deposited does not relieve the employer of the prohibted transaction. again, the penalty on that is rather small, but continues until corrected (if I remember correctly)

[david rigby]

If the 402(g) limit was exceeded on one plan, that may increase the chances of an audit.

[goldtpa]

Tom

Thanks for responding. I know that the $15 is a rather small amount. I agree with Pax, the 402(g) was exceeded and therefore give the $15 back. Didn't seem like a big deal to me. However the $15 was apart of a larger amount of money than was never deposted. Approx $500 was withheld from the NHCEs pay and never deposited. Of the $500, $15 belonged to the HCE.