another excess deferral question

[TPAnnie]

I'm trying to figure out whether a 2008 excess deferral being distributed prior to 4/15/09 is taxable to the participant as 2008 income or 2009 income. Though it's clear the earning/loss is taxable income in the year distributed, all my research leads to conflicting answers about the actual excess. One contradiction in the same book!

1) What year is the excess deferral taxable to the pp?

2) Can anyone distinguish between these two Q&As?

Q1: How are distributions of pre-tax excess deferrals taxed to the participant?

A1: For plan years beginning on January 1, 2008, or later, distributions of excess deferrals, as adjusted for earnings (including gap period earnings (see chapter 9)), are taxed to the participant in the year distributed. This PPA-enacted rule simplifies the process for plan participants, since they no longer are at risk of having to file an amended return in the event excess deferrals are returned to them after they have filed their prior year's tax return. There is no penalty tax for distribution of pre-tax excess deferral amounts made to participants who are under age 591/2 .

Q2: What is the tax treatment of corrective distributions to employees?

A2: Because the amount of excess deferrals is includable in the participant's gross income for the calendar year in which the excess deferral is made, a timely corrective distribution of excess deferrals is not included in the participant's gross income for the distribution year. However, the income or loss allocable to excess deferrals is taken into account in determining the participant's gross income for the taxable year in which the distribution of excess deferrals occurs.

Our research indicates PPA speaks only to excess contributions and excess aggregate cotnributions (failed ADP/ACP refunds). However, Q1:A1 above implies that PPA also addresses excess deferrals.

thanks so much!

Annie

[Jim Chad]

Question 2 is old law and refers to Plan Years beginning before 1-1-08......I think.

[TPAnnie]

Question 2 is old law and refers to Plan Years beginning before 1-1-08......I think.

Hi! I'm sorry, I should have been more clear...both questions 1 and 2 were in different sections of the same answer book - a 2009 answer book at that.

Maybe Q2 does apply to plan years prior to 1/1/08, but I would think it would be noted something to the effect of "this is the old, this is the new" if that was the case.

Regardless, I can't find anything other than this Q&A that says PPA applies to 402(g).

Thanks in advance for any more help!!

[Lou S.]

I'm pretty sure they added 402(g) refunds being taxable in the year distributed in a recent PPA technical corrections bill or in WRERA (if I got the accronym correct). If I can find the site I'll post.

EDIT: I've found a few references to WRERA eliminating gap period income on 402(g) excess deferrals but I must say I have not found where it extends the tax treatment to the year distributed, instead of year deferred. I'll have to look a bit more I was pretty sure the excess deferrals got the same tretment as excess contributions but it would not surprise me if the IRS treats them diferrently.

[Jim Chad]

Annieruok, you were clear. That is the way I understood your question.

My guess is that in updating: someone missed the second question. I have had one experience helping someone updating just one chapter for a new law. I was amazed at how difficult it is to catch all of the places the book referred to one change in the law. ....and there were many changes.

I think your idea would certainly clarify it and might be in the next edition.

[TPAnnie]

Lou...we agree, we can't find WRERA referencing 402g taxability either. Nor PPA.

Jim, do you feel PPA addressed the tax year of excess deferrals at the same time as excess contributions/aggregate contributions? Or, is it somewhere else?

I've got a pretty significant excess deferral for an owner, and want to make sure I explain the tax part correctly.

By the way, I called the fund company (since they issue the 1099s) to find out what their position was...I gave them specifics, even the pp's account. They confirmed the excess deferral is taxable in 2008 on an 09 1099R code P, and the gain/loss is reported for 2009 on a 2009 1099R code 8. I am hesitant using them as my decision-maker though, as I can envision 2009 1099R instructions changing their decision, yet I'm the one that gave the bad information.

[Tom Poje]

think of it this way:

the participant is filing his 1040 tax return.

he includes the W-2, it says deferrals = 20,000 and the IRS knows the person is not catch up eligible, so the IRS knows the person has 4,500 in excess deferrals. end discussion. the person couldn't defer it so its taxed in the year it was made, not distributed. (this is somewhat different than for failing the ADP test, in which the reason for receiving a distribution is different. plus the IRS doesn't receive a "W-2" for the return of failed tests, etc.) I do not see anything to indicate any change under WRERA, except for the elimination of GAP income)

If the person does not 'claim' that 4,500 as income for 2008, the IRS is going to (or at least should if they catch it) write back and tell him to correct the form. it is taxable as income in the year it pertains to, not distributed.

(by the way, as a result, if the amount is not distributed by April 15, then the person will get taxed a second time when the distribution is actually made!)

gains are taxed in the year actually received (or losses, which would be indicated under 'other income' on the tax form.)

[TPAnnie]

Ok, that is exactly our reasoning. But, because it is logical, makes perfect sense...and not to mention both the 2008 AND 2009 401(k) Answer Book specifically says that PPA changed the year of reporting for 402(g) refunds...we started to doubt our position.

Jim's comment that someone missed the editing seems plausible for one year, though it's hard to believe no one mentioned the error in 2008 so now it's been missed again for the 2009 edition. Wonder if anyone related to that book peruses this forum?

I really appreciate everyone's help on this! Thanks so much!

Annie

[Lou S.]

Ok, that is exactly our reasoning. But, because it is logical, makes perfect sense...

...doesn't mean that will be the IRS position.

I agree with both you and Tom that it makes sense that the deferral is taxable in the year deferred but for some reason I was under the impression the IRS decided to treat all refunds as taxable in the year received for simplicity. I guess not, I'm glad we haven't process any excess deferrals yet.

Oh and if there is a loss, which is very likely you won't have a 1099-R for it, just your letter to participant explaining the tax treatment, always fun to try to explain to the participant, their accountant, and HR department.

[Below Ground]

I find myself confused. Admittedly, this is very common. Any help would be much appreciated.

So, for Excess Deferrals taxation is in the year of deferral; except if after April 15th, then taxation is year of deferral and year of receipt. Is that correct?

Also, we know that there is no GAP on Excess Contributions or Excess Aggregate. When does it start that there is no GAP for Excess Deferrals?

[Lou S.]

You are correct. After 4/15 double taxation - deferral and reciept year.

Gap period income was eliminated for 2008 plan years and later to conform to the elimination of GAP period income on excess contributions and excess aggragate contribuions.

[Tom Poje]

see page 10 of Publication 525.

do a search and just type in Publication 525 in Google.

[Guest jjren]

Can anyone point me to the provision in the WRERA that eliminates the requirement of gap period income for excess deferrals? I have seen references to it, but can't find the actual provision.

Thanks.

[Guest jjren]

I found the reference in WRERA. In case anyone else is interested, Section 109(b)(3) changed Section 402(g)(2)(A)(ii) of the Code by inserting "through the end of such taxable year" after "such amount".

[Guest DNH]

My question is similar in topic but a little different. I was trying to clarify "somewhere" that the 3/16 deadline no longer exists as far as refunding corrective distributions relating to failed tests in order to avoid the 10% employer-paid excise tax as reported on F5330........ the rule is now (I think) that the corrective distributions must be returned by 12/31 but no longer by 3/15 so no longer a penalty tax (assuming again refunded by 12/31) Correct? Would appreciate any input. Thank you. DN

[K2retire]

My question is similar in topic but a little different. I was trying to clarify "somewhere" that the 3/16 deadline no longer exists as far as refunding corrective distributions relating to failed tests in order to avoid the 10% employer-paid excise tax as reported on F5330........ the rule is now (I think) that the corrective distributions must be returned by 12/31 but no longer by 3/15 so no longer a penalty tax (assuming again refunded by 12/31) Correct? Would appreciate any input. Thank you. DN

I haven't heard that before.

PPA extended the deadline to 6-30 for some automatic enrollment plans. Otherwise it's still March 15 (not 16).

[AKconsult]

PPA amended Code Sec 4979(f) to say that the 10% excise tax for excess contributions and excess aggregate contributions does not apply until 6 months after the end of the plan year (instead of 2 1/2 months after the end of the plan year) for plans that use an Automatic Contribution Arrangement (see Sec 902(e) of PPA).

For all other plans, the 10% excise tax does still apply if the corrections are not made by 2 1/2 months after the end of the plan year. That has not changed.

However, PPA also amended Code Sec 4979(f) to say that amounts returned on account of excess contributions and excess aggregate contributions shall be treated as earned and received in the taxable year in which the distributions are made. Previously, the Code allowed that distributions paid before 2 1/2 months were taxable for the year contributed. So the tax consequence to the HCE is different but the excise tax to the employer is the same rule.

[Guest DNH]

PPA amended Code Sec 4979(f) to say that the 10% excise tax for excess contributions and excess aggregate contributions does not apply until 6 months after the end of the plan year (instead of 2 1/2 months after the end of the plan year) for plans that use an Automatic Contribution Arrangement (see Sec 902(e) of PPA).

For all other plans, the 10% excise tax does still apply if the corrections are not made by 2 1/2 months after the end of the plan year. That has not changed.

However, PPA also amended Code Sec 4979(f) to say that amounts returned on account of excess contributions and excess aggregate contributions shall be treated as earned and received in the taxable year in which the distributions are made. Previously, the Code allowed that distributions paid before 2 1/2 months were taxable for the year contributed. So the tax consequence to the HCE is different but the excise tax to the employer is the same rule.