Excess Deferral Correction

[Alex Daisy]

A participant under age 50 had an Excess Deferral of $7,000 in 2008. They contributed $22,500 in total for 2008.

This participant is a HCE.

It is my understanding that the excess deferral needs to be included in the ADP test.

Since this excess was caught before the W-2 was issued, can we fix the W-2 to include the Excess deferral as Income and therefore, not have to include the excess deferral in the ADP test?

[J Simmons]

I think it yet counts in ADP. Treas Reg § 1.401(k)-2(a)(4)(iii).

[Guest Sieve]

Whether or not you "fix" the W-2, this individual still has to include the excess $7,000 in compensation when filing income tax returns for 2008. JSimmons is correct that the full amount ($22,500) still must be included in the 2008 ADP test even if returned to the employee--if the employee was an HCE (Treas. Reg. Section 1.401(k)-2(a)(4)(iii)). If not an HCE, then, presumably, the excess deferral will NOT be included in ADP testing.

Regardless of ADP treatment, the excess deferrals will/may have to be removed from the plan, if the plan requires/permits, pursuant to plan provisions and to the procedures described in Treas. Reg. Section 1.402(g)-1(e). If so required/permitted, and if not removed by April 15, 2009, then those amounts will be taxable when distributed (in addition to being includible in income in 2008) (Treas Reg. Section 1.402(g)-1(e)(8)). If the plan requires removal, then there would be a violation of the document if removal did not occur, and, I assume, EPCRS would apply.