Mandatory Contributions - 401(a)(17) Excess

[wmyer]

What is the correction method if an employer does not stop taking mandatory contributions when an employee's compensation reaches $205,000 (for 2004)?

This is a 403(b) plan with a 2% mandatory contribution (mandatory as condition of employment). Since mandatory contributions are generally treated as employer contributions, can any excess be forfeited and then paid as additional compensation outside of the plan? Cites?

[Guest AKB]

These contributions, I am guessing, are not pre-tax. So, income tax and social security taxes will have already been paid on those contributions? The only tax consequence that would need to be accounted for are probably the earnings attributable to those excess contributions? If the assumptions are correct you should be able to have the plan return the excess contributions to the employee with the appropriate 1099R filing. Check applicable 1099 R instructions for codes.

[david rigby]

When the employer "does not stop taking mandatory contributions", is this binding on the plan? Do plan provisions state what happens inside the plan in this case?

[Kirk Maldonado]

Is this a governmental plan?

For some reason, I thought that there was a problem with requiring mandatory contributions as a condition of employment unless the employer was a governmental entity, but I can't remember what the basis for that supposed problem was.

Does this ring a bell for anybody else?

[rcline46]

First, mandatory contributions must be EE not ER contributions. I don't see any way to classify as ER regardless of entity/plan type.

Second, even though it is post-tax money, I believe that it is an over-contribution and must be returned to the employee, with 1099-R for any earnings.

Lastly, I don't read that the contributions were a condition of employment, but it is not clear from the post. They may just be a condition for participating in a plan and I don't think that has changed since forever - to get an accrual of ER contributions, you have to make a contribution.