Gap Period Income

[Guest Rutager]

Does an employer have to allocate GAP period earnings on a 2006 excess deferral which is distributed in 2007? Is this now a requirement under the new 401(k) regulations or is it still optional based on the plan language?

[Bob R]

The requirement to distribute gap period income on 402(g) excess deferrals is found in the proposed regulations dealing with the taxation of Roth distributions. These regulations are only proposed - but may be relied on. So, distribitons in 2007 should be made with gap period income.

[Guest BJ]

IRS Employee Plan News (Winter 2007) page 16 indicates that an amendment is required if the plan does not provide for distribution of gap period income on 402(g) excess deferrals. Are the proposed 402(g) (Roth) regulations effective 1/01/2006 required to be followed with respect to distribution of 2006 402(g) excess deferrals made in 2007? If so, are all 401(k) plans required to be amended to provide for gap period income on 402(g) excess deferrals or only those plans required to make a distribution of 402(g) excess deferrals? PPA eliminates the requirement for gap period income on excess contributions (ADP/ACP corrective distributions) effective for the 2008 plan year. Will this elimination only apply to plans that are amended effective in 2008 to eliminate this requirement contained in the final 401(k)/401(m) amendment?

[Guest Blbvip]

The Final 401(k) Regulations require gap income for 2006 & 2007. The PPA removes gap income effective for the 2008 plan year.

[Guest BJ]

I believe that PPA 2006 eliminated gap period income in 2008 only for excess contributions due to an ADP or ACP testing failure, but not for 402(g) excess deferrals. I understand that the proposed Roth regulations 1.402(g)-5 issued 1/26/2006 provide that gap period income is required for 402(g) excess deferral refunds for taxable years beginning on or after 1/01/2006 (distributions made in a taxable year beginning on or after 1/01/2007). The dilemma is whether to anticipate that this requirement will be contained in the final Roth regulations and include gap period income on 2006 402(g) excess deferrals which I believe would require a plan amendment if the plan does not already provide for the inclusion of gap period income on excess deferrals. The other option would be to assume that IRS will no longer require gap period income on 402(g) excess deferrals when final regulations are issued because of PPAs elimination of gap period income on corrective distributions due to an ADP or ACP testing failure. If the final 402(g) regulations do require the inclusion of gap period income on 402(g) refunds retroactive to the 2006 taxable year, then it would seem that the 402(g) excess would not have been fully corrected.