Excess Contribution question

[fiona1]

Q: 401(k) plan fails ADP test for 1/1/05 to 12/31/05 plan year. 4 Highly Compensated employees are due refunds below:

Employee 1: $4,000.00

Employee 2: $3,000.00

Employee 3: $2,000.00

Employee 4: $1,000.00

Employee 1 and 3 are still active. Employee 2 terminated on 1/31/06 and took a cash distribution. Employee 4 terminated on 7/14/06 and took a cash distribution as well. Employee's 2 and 4 have ZERO funds in the plan.

Since the March 15th, 2006 deadline is passed, the plan sponser must pay a 10% excise tax. Will this tax be:

A) 10% of $10,000. 10% will apply to all refunds, despite any distributions.

B) 10% of $6,000. The 10% will not apply to EE 2 and 4 since they have already taken a distribution.

C) 10% of $7,000. The 10% will not apply to EE 2 since his distribution was before 3/15/06. But it will apply to EE 4 since his distribution was after 3/15/06.

[Just Me]

I vote for C.

[Belgarath]

I would vote for C as well. But you probably have some other issues as well, which I haven't considered but off the top of my head, withholding was probably incorrect as these amounts were not eligible rollover distributions. Don't know if that needs to corrected, but at the least, the employees should be notified in case they subsequently rolled over their distributions.

[BG5150]

I would vote for C as well. But you probably have some other issues as well, which I haven't considered but off the top of my head, withholding was probably incorrect as these amounts were not eligible rollover distributions. Don't know if that needs to corrected, but at the least, the employees should be notified in case they subsequently rolled over their distributions.

I agree. But I don't think it's really a big deal if more withholding was taken than necessary.

However, they should be contacted to make sure only the correct amounts were rolled over. And, 1099's need to be redone.