Excess deferral and related matching

[Guest Dennis Siko]

In plan year 1998 an EE contributed $12,500 in Salary Deferral. He must remove the $2,500 + gains of the deferral. The match went in per pay period. Does the match relating to the additional $2,500 (excess deferral) also have come out of the plan with the gain on the match? How many 1099R's?

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[Guest T Hoffman]

Two 1099s are due. One for the excess deferral amount that is being distributed after the close of the calendar year, and one for reporting allocable income distributed.

As for the match, the plan document will control. Usually, the match on EDs is forfeited. It can't remain in the participant's account because it would be a discriminatory rate of match.

[Disco Stu]

It depends on the match formula. If there is a dollar for dollar match, then yes, attributable match would be forfeited. If there is a cap on the match, then you may not be returning matched salary deferrals. No need to forfeit in that case. Same deal with a returned ADP excess.

[Dan]

The deferral amount in excess of $10,000, plus earnings attributable to the excess deferral, must be distributed by 4/15/99 for 12/31/98 PYE.

The same is true for the portion of the match attributable to the excess deferral, except that only the vested portion of the match (plus attributable earnings) should be distributed. The non-vested portion of match plus earnings should be forfeited.

If the excess portions are distributed prior to the 4/15/99 deadline it is taxable in the year in which the first deferrals were made to the plan, a first in, first out idea. If excess is distributed after that date, then distribution is taxed in the year which first deferrals were made AND in the year of distribution. Double taxation.

[iRC § 401(m)(6)(A); Treas Reg §§ 1.401(m)-1(e)(1)(i), 1.401(m)-1(e)(1)(ii), 1.401(m)-1(e)(3), 1.415-6(B)(6)(iv); Rev Proc 92-93, 1992-2 CB 505]

[This message has been edited by Dan (edited 03-11-99).]

[M R Bernardin]

The 401(m) regulations do not permit distribution of matching contributions merely because the contributions to which they relate are excess contributions, excess deferrals (your situation), or excess aggregate contributions. So, the plan document has to permit distribution of the match under these circumstances in order to distribute. The "attributable-to" matching contributions may be forfeited, even if the match would otherwise be vested. (It is a match which fails the ACP test which cannot be forfeited if it's vested.) If the plan allows the match to be distributed, it would still be counted for purposes of 401(a)(4), so that you must be able to demonstrate that, after distribution, the rate of match (including the match that was distributed) is nondiscriminatory. For that reason, many documents simply provide for forfeiture in this situation.

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[Disco Stu]

I am in agreement with previous post. I was unaware that a plan could allow a distribution of match in this scenario. It seems impracticable to have a provision like that in your plan. From year to year, you would never know if your match was non-discriminatory.

Have you actually dealt with a plan that had such a provision? If I was in that plan, I'd be deferring $50,000 a year.

[This message has been edited by Disco Stu (edited 03-11-99).]

[Guest ATaylor]

In response to Dan's message, if the excess deferral is not distributed prior to the 4/15 deadline (which needs to be provided in the Plan Document) then the excess becomes taxable but cannot be distributed until there is otherwise a distributable event under the Plan. See reg. 1.402(g)-1(e)(8)(iii). At which time, I would agree, the distribution would be taxed a second time.

I understand though that a plan could distribute after 4/15 if they are filing under one of the IRS corrective programs using EPCRS.