Non-deductible deferrals

[Guest dhall5]

During the 2005 PY, a broker accepted personal checks as deferral deposits from 3 participants. The plan administrator was unaware of this, and therefore showed only the deferral amounts actually deducted from payroll on the W-2s. 2 of the participants have terminated and rolled their accounts into IRAs, while the 3rd employee still has her money in the plan. One participant even exceeded the 402(g) limit by $3,000.

The client rightfully feels that they should not have to amend the 2005 W-2s and corporate tax return, but that the participants need to amend their returns instead.

How do we go about correcting this?

[Leopurrd]

If the client was withholding based on the deferral elections on file, I would agree that the client should not have to amend. first of all, the deferrals should have been pre tax. Since the participants cut a check, that was definitely post tax....

As to how to fix? This is definitely new to me. Those that rolled over to an IRA should probably have their custodian notified that the distribution was not entirely pre-tax.

The plan probably should return the other deferrals as a mistake of fact??? I'm anxious to see how someone else on the board would handle this.

[Guest 401KAmerica]

During the 2005 PY, a broker accepted personal checks as deferral deposits from 3 participants. Report the Broker to the Branch Manager.

The plan administrator was unaware of this, and therefore showed only the deferral amounts actually deducted from payroll on the W-2s. This was correct except on the reconciliatoin of assets, the Admin should have seen extra contributions and questioned?

2 of the participants have terminated and rolled their accounts into IRAs, (the two that rolled, are actually in the same place they would have been since their deferrals did not hit their W-2. )

while the 3rd employee still has her money in the plan. Money has to be refunded out of the Plan as it is not allowed.

One participant even exceeded the 402(g) limit by $3,000. Does not matter, as the whole transaction is employee driven.

The client rightfully feels that they should not have to amend the 2005 W-2s and corporate tax return, but that the participants need to amend their returns instead. Absolutely right. Why would the Client Amend, they did not withhold?

How do we go about correcting this? Get money out of PLan of 3rd Employee. On the frist two, make sure Administrator shows money as payable out of Plan as incorrect deposit.

[Sully]

Has the 5500 been filed for 2005? If so, and it does not reflect these deposits as being part of the plan then you will have to amend the return. I would show the assets as part of the plan and a corresponding liability.