Attempted 401(k) Contribution

[Guest ccl]

I have a situation where an employee wrote a check as an attempted contribution to his 401(k) plan. Only salary deferrals are allowed as contributions, thus he can't contribute this money. The employer cashed the check but did not contribute it to his 401(k) account. They finally realized they had the money a few months later and are returning it to him plus interest. My question is: is this interest taxable compensation to the employee (now former employee), does the employer have to withhold on the interest for FICA, Federal Inc. tax, local tax etc?

Thanks

-C

[masteff]

My question is: is this interest taxable compensation to the employee (now former employee), does the employer have to withhold on the interest for FICA, Federal Inc. tax, local tax etc?

No. At most it'd go on a 1099-INT and because of the type of interest, it's subject to a $600 reporting threshhold (so if less than $600, don't have to report it). See instructions for Box 1 on Form 1099-INT: http://www.irs.gov/pub/irs-pdf/i1099int.pdf

[Guest ccl]

My question is: is this interest taxable compensation to the employee (now former employee), does the employer have to withhold on the interest for FICA, Federal Inc. tax, local tax etc?

No. At most it'd go on a 1099-INT and because of the type of interest, it's subject to a $600 reporting threshhold (so if less than $600, don't have to report it). See instructions for Box 1 on Form 1099-INT: http://www.irs.gov/pub/irs-pdf/i1099int.pdf

Thanks for the response. Is there no withholding basically because its not considered wages?

[JanetM]

Correct, the employee gave the ER a loan and the ER paid it back with interest. No EE taxes required.

[Guest ccl]

Correct, the employee gave the ER a loan and the ER paid it back with interest. No EE taxes required.

Thanks!