402g excess deferrals with Losses

[zimbo]

It seems clear that when an excess deferral resulting from a 402g violation (deferral in excess of $15,500 for example) had investment losses, the participant must report the gross excess in the year deferred (2008) while the loss is taken on their personal tax return in 2009. However, how is the 1099-R done?

In reading the IRS instructions, it appears that the amount reported on the 1099-R, taxable in 2008, is the actual distribution which has been reduced by the losses. If so, how and where does the participant report the the full excess deferral in 2008?

Any thoughts would be appreciated?

[Tom Poje]

since the amount someone defers is listed on the W-2, the IRS knows how much excess deferrals someone has, therefore that is the amount they expect to see for tax purposes on the 2008 form.

according to the ERISA Outline Book (which is basing its comments on Notice 98-32) [11.303 2006 edition]

you provide 1 1099R. The amount reported and taxable amount = distribution amount

"A seperate statement provided with the form must state the entire amount of excess deferrals (unadjsuted for the loss) must be reported in income for the deferral year, and that the loss may be taken for the distribution year."

note the loss under "Other Income" on your tax form. of course this statement is a year after the fact, but hopefully this year you have told the individual you need to claim this as income and next year we will send you a 1099R

I guess this implies that the IRS can tell looking at the 1099 (in this case it would be a 2009 form - so 12 months from now) based on the coding that the excess deferrals have already been taxed. The IRS can then compare the 1099 with the prior year's tax form, realize there is a difference and quickly realize that the amount found on the 2009 tax form under 'other income' is indeed negative and matches to the nearest dollar.

[zimbo]

But as I see it, the problem is that the 1099-R they receive in early 2010 shows as taxable in 2008 the lesser of (1) the actual corrective distribution with the gains or losses built in, or (2) the amount of the excess deferral.

When there are losses, the amount on the 1099-R will be LESS than the excess deferral. How then could the IRS possibly check to see that the actual excess deferral in its entirety was taken as income in 2008. They could not possibly know this by looking at the 1099-R. It seems very illogical. What seems more logical is that the 1099-R would show the excess deferral (then the loss would be taken in the following year in the "usual" manner).

But I concede that the IRS 1099-R instructions seem to support what you say.

[Tom Poje]

lets say the person deferred 16,500 not catch up eligible. so 1000 in excess deferral

lets say there was a $100 loss, so the 1099 will show a distribution of only $900.

however, the IRS has the W-2 which shows deferrals of 16,500, so the irs would expect 1000 in excess deferral on the 2008 tax form. ince the 1099 only shows 900, there must have been a loss of 100 which should show up - though interestingly enough, the way things read is that the person 'may' claim the loss, though I guess they don't have to.