Excess Salary Deferrals

[Dougsbpc]

In 2008 a participant in a 401(k) plan made salary deferrals of $24,000 instead of $20,500. We informed the plan sponsor / trustee to remove the excess in early March 2009 but they failed to do so.

I believe VCP/SCP is the only way to correct this now.

If they distribute the excess plus earnings now, the amount is double taxed. How is this done? Does the participant receive two 1099's in January 2010 (one showing $3,500 taxable for 2008 and one showing the excess + earnings taxable for 2009)? If this is the case and the participant has still not filed his 2008 tax return, could the additional $3,500 be reported now on the tax return even though he will not have a 2008 1099 reporting this yet?

Thanks a million.

[Tom Poje]

you would only receive 1 1099 indicating the year the distribution was actually made.

as for the year in which the excess deferrals were actually made - that is up to the individual to report.

the participant files their tax form with their W-2, and in your case, the W-2 clearly shows 24,000 in deferrals. hence, the IRS should know that there are excess deferrals, and whether or not the person actually claimed them.

note that you only are double taxed on the deferrals not the gains. you are only taxed on them once, in the year of actual distribution.

you are correct, this would be correct under EPCRS.

[BG5150]

But no gap period earnings are calculated, right?