How should the 1099R be issued for plan limit violations (e.g., if the

[Guest Frank Jackson]

How should the 1099R be issued for plan limit violations? ( For example, if the plan only allows a 10% deferral rate but a participant contributes 15% ) How should the refund be coded? Should the 402(g) rules be followed? Contributions coded as prior year and earnings as current year if distributed before April 15 or should the entire amount with earnings be coded as current year? This was a questions in the Q/A column but I do not think it specifically addressed the 1099R issue.

Any references would help.

[Alf]

I don't think that I have ever seen any guidance on this, but it should be treated the same as a 402(g) correction. The earnings should probably be reported in the year of correction becasue that is when the participant first had access to the money. The contributions are taxable in the year of deferral under the constructive receipt rules.

[Dowist]

There is no statutory mechanism for returning contributions made in excess of what the plan allows. This is an operational defect (a failure to follow the terms of the plan) which can be corrected under the voluntary correction programs of the IRS. If the defect is insignificant or if it occurred within 2 years it can be corrected unilaterally by the Plan sponsor; if not you have to go VCR or walk-in CAP (closing agreement program). You need to review to review the rules of these programs and their respective costs and advantages/disadvantages before deciding what to do.

There are Revenue Procedures that describe all of this. I believe one this year describes the IRS-approved correction methods, and I am sure that one of defects/correction methods covered is your defect.

Correction will most probably require refund (as you also surmised). As to when the refunds are included in income, I'm not so sure you follow the 402(g) rules. Unlike 402(g) you don't have a statute that says that payments made in year 2 are taxable in year 1 - this is a statutory exception to the "cash basis" accounting that normally applies to plan distributions. There may be some direction in the Rev. Proc.'s referred to above.

Good luck.