Excess Elective Deferrals

[Guest sbavely]

Need help determining the treatment of 402(g) violations not returned by April 15th.

[LCARUSI]

There are issues for the participant and the Plan Sponsor:

For the participant:

1) excess deferral is includible in gross income for for the year

2) excess deferral is taxed again when it is withdrawn from the plan

3) excess deferral is subject to the same withdrawal restrictions as regular 401(k) contributions to the Plan

For the Sponsor:

If the excess deferral is due to participation in multiple plans of different employers(and no single plan exceeds $10,000), then there is no problem for any of the Sponsors.

If the participant goes over $10,000 in a single plan and the refund is not processed in a timely fashion, it's a qualification issue. I don't know what happens in that case. Maybe someone else can discuss the appropriate procedure (VCR or whatever) for requesting mercy from the IRS.

[Guest sbavely]

Thanks for the quick response. Am I understanding correctly that after April 15th you cannot return this money, but rather, must wait for a distributable event?

[LCARUSI]

Yes, after 4/15 you must have a distributable event.

[Guest Beavis]

I am in agreement with LCARUSI's methodology execpt for the piece about waiting for a distributable event.

A 402(g) excess not returned by 4/15 is the poster child for correction under APRSC. This program allows plan sponsors to self correct operational failures. APRSC would give you the authority to distribute without waiting for one of the customary distributable events.

[LCARUSI]

I disagree with Beavis.

1.402(g)-1(ii)(8)(iii) provides that distributions after 4/15 can only be made when permitted under 401(k)(2)(B).

401(k)(2)(B) lists the conditions under which 401(k) funds can be distributed - separation from service, hardship etc.

I am not familiar with the APRSC program, but it's hard to believe you can (under this program) take an action which violates the applicable code and regs.

[david shipp]

Follow this link to the Reish & Luftman Q&A column on plan defects, and specifically their response to using the SVP for 402(g) excesses that are not returned in a timely manner.

Q66

Also take a look at questions 67,68 an 69.

[This message has been edited by david shipp (edited 11-18-98).]

[LCARUSI]

David -

Thank you. I stand corrected.

[Guest dlm]

We had this same exact issue come up. We went thru SVP. Was pretty simple process (there is a fee of course)-ok'd by IRS pretty easily. Basically, we calculated earnings due and called it taxable in 2 tax years. IRS said, ok.

See SVP-info you need to submit to IRS is pretty clear.

[Guest Beavis]

Although you will want to use the correction method specified by SVP, there is no reason that the IRS needs to be made aware of the error. The SVP program entails an IRS submission and a user fee.

Since APRSC is a self correction program, there are no user fees or filing requirements. Just make sure that you meet the requirements for using the program. The Q&A column referenced david shipp's earlier post is a good reference tool if you are unfamiliar with the APRSC program.

I am guessing that the scenario from the previous post is from that bleak period before the IRS brightend all of our lives with the panacea that is APRSC.

[This message has been edited by Beavis (edited 11-23-98).]

[Guest dlm]

You are correct. We used SVP since the IRS rules on APRSC were at the time unclear. ALSO...the client wanted to have the IRS okay the matter-especially since it was an HCE. This way, if it came up on audit, we would have proof that the IRS already gave their stamp of approval on our correction.