Excess contributions in off-calendar plan

[Guest DTromb]

I read a post from several years ago regarding using refunds to correct a failed ADP test in a plan with a non-calendar year plan year. The question was regarding the 1099-R code to use. The practicioner who answered said that in their experience most off-calendar year plans distribute refunds after the 2 1/2 month period, paying the excise tax, so that personal returns do not have to be amended.

Just curious to know if anyone else has any experience in this type of situation.

Thanks!

[ERISAnut]

That is a good rule of thumb. Corrective distributions of Elective deferrals are taxable to the employee on a First In - First Out basis. Therefore, the deferrals that are distributed first are the deferrals that were first contributed during the plan year. If a plan year ends June 30, 2006 and corrective distributions (excess employee contributions) will be taxable in 2005 if the corrections are made within 2 1/2 months after the plan year end (September 15, 2006).

Now suppose the plan year end is October 31, 2006, and the corrective distributions are made on December 15th, 2007. They are taxable to the participant in 2005. This goes back two taxable years and will be coded as a "D" on the 1099-R.

Congress is actually looking into changing the laws to make all corrective distributions taxable in the year distributed which will make all of this a non-issue. But, for now, this is the way it is.

[Guest DTromb]

Thanks!