Late 402(g) Excess Deferral

[DTH]

I have a participant for deferred 11,400 in 2002 (deferral limit was $11,000). During a plan audit, it was discovered that the plan never distributed the $400 excess. When earnings/losses were determined there was a loss greater than the 402(g) excess deferral:

$ 400 excess deferral

$(430) loss

$ (30) total

EPCRS says to tax report the 402(g) excess deferral in the year of the deferral and the excess deferral plus gain/loss in the year distributed. 2002 is a closed tax year.

Since 2002 is a closed tax year, should the plan still report the $400 on a 2002 Form 1099-R?

The plan will process the excess deferral in 2008 with the loss. Is there anything that needs to be tax reported on a 2008 Form 1099-R? The 1099-R instructions indicate that only distributions of $10 or more are reported.

Thanks!

[Tom Poje]

something doesn't sound right.

lets suppose the only $ involved at att was $400 and it was invested anywhere.

you are saying that that amount is now worth $ -30?

I suppose that is possible with bank charges and the account was overdrawn or something, but how did it happen with a retirement fund? (Stopping short of a prohibited transaction or something)

[DTH]

When the gap earnings were applies from 2002 through 2008 there was a loss of $430. Timing is everything.

[John Feldt ERPA CPC QPA]

Ignore the other $11,000 and it's earnings, it's not getting refunded.

You're saying that the $400 excess amount, all by itself, has gone down by $430; the earnings/losses on just the $400 excess has turned it into -$30?

???

edit: for a typo

[DTH]

Yes. The $400 excess was run through the gap period earnings calculator and the gain/loss shows as a loss of ($430). Scary I know.

[John Feldt ERPA CPC QPA]

Hmmmm. If the result you provide is truly correct, then with a contribution of $11,400, then the entire account should now have lost $12,255 and it's overall balance must be about -$855.

Is the calculator an HP 128c with Reverse Polish Notation (RPN)?

edit: typo!

[JanetM]

Just explain to me how the value can go negative. Once it hits Zero its worthless. Is this some new CSO, swap or other evil investment from investment banks ?

[Tom Poje]

I'm as slow as the correction on this one.

I thought you were permitted to determine the earnings using any reasonable method.

if you use the 'alternative method' for gap period earnings where you simply multiply by a number of months, then I guess you could end up 'in the whole' so to speak after a number of years.

even at that point I would conclude "that method of calculating gains/losses makes no sense" use another method to determine gains. you are not calculating a 'penalty' for being late. I still think it is simply impossible for a plan to lose more money than it is worth. again, the only way that might be possible would be to be using an alternative method of calculating gains.

all that being said, I can see an adjustment being required under EPCRS, but I don't think I would use the term 'gap period'. I think that is a pretty specific term which disappeared for a number of years (unless the document specifically requires it) and then it came back for 2 years, but only for ADP/ACP failures and not excess deferrals.

[DTH]

I'm veifying that the earnings from 2000 - distribution are being calculated correctly. Assuming it was...

Normally, if there was a loss and a check produced there's no problem. For example:

P contributed $16,500 in 2007

Excess deferral of $1,000 paid 2/28/08

Loss is $50

Check amount will be $950

P will get one 2008 Form 1099-R. The $1,000 excess deferral will be tax reported with a Code "P" (taxable in 2007); the loss is not reported at all. The taxpayer will receive a letter of explanation indicating there was a $50 loss. Generally, the taxpayer will include the $1,000 in box 7 of the 2007 IRS Form 1040 and the taxpayer may take the loss by entering the loss as a bracketed amount ($50) in line 21 of the 2008 Form 1040.

Since the net check is actually zero. could you say that there is a "de facto loss" and nothing needs to be distributed. Or would you say that the $400 still needs to be distributed with a 2008 1099-R with Code "8" (taxable in 2008) and send the participant a letter of explanation that there was a loss of $430?

Makes you kinda go hummmm.

[JanetM]

Doubt the IRS would let you do loss for more then the investment is worth. I invest $1000 and it becomes worthless - I can't take write off of more than the $1000 I invested. (ignoring trading costs and other investment expenses of course)

[Kimberly S]

Or do you send a 1099R for $400 and letter saying the loss was $430, and tell the participant to pay back the other $30? (In case it's not obvious, I'm agreeing with everyone who questioned how you can lose more than the investment.)

[Guest penben]

I am a new administrator and need to know where can I find a calculation for earnings on excess deferrals.

Thank you