What happens if one of my participants overcontributes?

[Guest DFR]

I have a new participant -

I want to allow him to contribute 13,800 this year so he can take full advantage of the ER match. (He's over 70 so isn't really interested in making contributions for any other reason.)

He may have contributed under another plan earlier this year (I'm not sure) but I AM sure that he has received a full distribution of his account balance under the prior ER's 401(k) plan (which will be shown as income for tax purposes I assume).

What's the worst that could happen if I let him contribute the full 13,800 and he overcontributes for 2008?

[buckaroo]

Nothing to the plan as long as the plan that he originally contributed to is unrelated. The issue comes in when he files his taxes. At that point, he will have a violation of 402(g) and may come back to you asking for a refund of contributions, which may trigger a forfeiture of the match contributions (depending how he has taken the distribtuion from the other plan).

[Guest DFR]

I know he's taken his account balance from the other plan as a distribution (i.e. has had 20% withholding applied). If/when it's discovered that he has exceeded the 402(g) limit, can I refer his tax accountant to the distribution under the other plan as offsetting any excess contributions?

(He's one of the higher ups here, and I don't want to tell him to contribute to get the match only to have to forfeit it in March - It would be career suicide for me!)

[Lou S.]

He probably rolled over the other plan (less RMD) so I don't see how you can say the refund came from the other plan. If on the odd chance he took a taxable distribution from the other plan over and above RMD you could probably classify a portion of that as 402(g) refund but you may have trouble getting the other TPA to issue the 1099-R that way.

[Guest DFR]

He definitely took the account balance from the other plan as a taxable distribution -- I'm not sure what the RMD amount is/was -- but it sounds like what I should do is coordinate with the other ER/Recordkeeper regarding classification of the distribution...and to the extent the distribution is greater than his RMD + (20,500 - 13,800)* he won't have to forfeit anything from my plan.

*In order for him to get the full ER match from my plan, he needs to contribute 6% of pay (up to the 230K limit)///