Penalty tax on distribution of excess deferrals?

[Richard Anderson]

Is a corrective distribution of excess deferrals made after April 15 subject to 10% penalty tax?

[Guest GregSelf]

Read Reg. Sect. 1.401(k)-1(d)(1) & Reg. Sect. 1.402(g)-1(e)(8)(iii). Things get a little hairy when you try to distribute excess 402(g) $$ after April 15. Distributions allowed only if distributable event has occurred. Double taxation on the participant. Bleck!

[Guest SSCARO]

Are we talking about vilation of 402g or failure of the ADP/ACP test?

[LCARUSI]

GregSelf -

I have good news and I have bad news. The good news is that I once agreed with you and took the same position as you on a similar question. The bad news is that I was promptly corrected by David Shipp.

In summary, you do not need a distributable event.

David pointed me to the Reish & Luftman Q&A column on plan defects question 66 (and also 67,68,69).

The original thread was posted by SBAVELY and its title was "Excess Elective Deferrals". It was originally posted on 11/17/98 and was last updated on 11/25/98.

[This message has been edited by LCARUSI (edited 08-30-1999).]

[Richard Anderson]

The 402(g)regs state that if the excess deferral is distributed by April 15 then it is not subject to the early distribution tax of 72(t). In the section on distributions after April 15 there is no similar mention of exclusion from the penalty tax.

I remember reading somewhere that the early distribution penalty tax applies on excess deferrals distributed after April 15. But, now I can't locate the source of that opinion.

Does anyone believe the 10% tax applies to late distributions of excess deferrals.

[Guest JMLSON]

There is no 10% excise tax regarding corrective distributions of 402(g) limit before or after april 15th. The "punishment for not making the corrective distribution in time is double taxation (once in the prior year as excess deferral distribution, and once in the current year which would include earnings). See Tres Reg. 1.402(g)-1(e)(8)(iii).

[Guest GregSelf]

LCARUSI:

Got it. Thanks.