Ineligible Employee Deferrals

[Guest PCS Inc]

We have a client who mistakenly let an employee begin deferring in December 2006 when she was not eligible until January 2007. She deferred a total of $182.54 and had $0.16 in earnings as of 12/31/06. I have been told several different ways to rectify this and am looking for confirmation.

Should the participant's 2006 W-2 be amended to reflect no deferrals, the deferral amount plus earnings (GAP?) be refunded and a 1099-R be issued for 2007 using code P? Can we physically leave the money in the account and simply short her 2007 deferrals (though still amending the W-2 and doing the 1099-R so as to indicate no 2006 deferrals)?

If this is incorrect, what are other options? Consider the amount part of the employer PS contribution instead and have the employer repay her this year for the amount withheld and correct the W-2? We'd prefer to do a self-correction as a mistake-in-fact situation, especially since the amount is so small...

[Jim Chad]

You can retroactively amend the document to make the Employee eligible or

You can forfeit the money and make the employee whole outside the Plan. Then amend the w-2 to show no deferrals. If the Employer was going to make a contribution, anyway, he is not really out anything. This can be done under self correction

[Guest PCS Inc]

Thanks for responding! Would the forfeiture be for the 2006 plan year or for 2007 since that is when it would be moved into the "forfeiture" account (each employee has separate accounts and then there is a commingled forfeiture account)?