Ineligible Ptp makes 401(k) conts and taxation

[buckaroo]

During the review of my client’s 2004 401(k) plan, I found that an employee was allowed to make 401(k) deferrals into the plan, even though he was not be eligible. (He will not be eligible until 2005.) I have read through the document and it states that the contributions need to be refunded to the employee with any attributable interest. So far, so good. However, it does not state how the participant is to be taxed? Is this like a 402(g) failure (contributions taxed in prior year, earnings in current year)? How is this taxed? How many 1099R forms? With what codes?

Any help would be greatly appreciated.

[Guest Robin S. Vatalaro]

I believe the W-2 is supposed to be amended, w/ the contributions being returned to the employee (eg give them the cash). EG if the deferrals occurred from 2004 paychecks, the 2004 W-2 should be amended.

This of course causes amendment of 941, W-3 etc also. I don't think a 1099 is the right answer because the money represents wages to the participant, not a retirement plan distribution.

[wmyer]

See http://www.reish.com/practice_areas/Techni...ps/IRStip91.cfm