correcting excess deferrals after April 15

[K2retire]

The ERISA Outline Book includes a reminder that excess deferrals not refunded by April 15 require some other distributable event to be paid out. The EPCRS correction says it is for the excess to be distributed, but doesn't mention waiting for a distributable event.

For a client who called after April 15 saying they just learned of the excess, what does one advise about timing of the distribution?

[Bill Presson]

The ERISA Outline Book includes a reminder that excess deferrals not refunded by April 15 require some other distributable event to be paid out. The EPCRS correction says it is for the excess to be distributed, but doesn't mention waiting for a distributable event.

For a client who called after April 15 saying they just learned of the excess, what does one advise about timing of the distribution?

It's my recollection that your mention of the other distributable event is correct. The other negative is that they still have to get a 1099 for the excess even though they don't get the money. So now those dollars will be taxed twice.

[Tom Poje]

I thought most documents had language that said the plan could not accept deferrals in excess of the limit, therefore if someone did indeed exceed the limit in that plan you have a failure of not following the terms of the document. this is a disqualifying event, and therefore correctable under EPCRS.

If the individual had excess deferrals due to deferring in 2 unrelated companies, neither plan has accepted $ in excess of the limit - therefore neither plan is in violation of any rule, so no neither plan is subject to disqualification. I think those are cases in which you have no 'distributable' event.

[K2retire]

This is a case of 2 unrelated employers. If I'm understanding you correctly, it is that fact that prevents the distribution until there is some other distributable event. If it was one plan, or two plans of related employers, the potential disqualification of the plan would allow the distribution now.

[BG5150]

It's my recollection that your mention of the other distributable event is correct. The other negative is that they still have to get a 1099 for the excess even though they don't get the money. So now those dollars will be taxed twice.

If the deferrals are to two different plans, which ER is responsible for the 1099?

[Tom Poje]

K2Retire:

thats my understanding. that's why you can correct under EPCRS, to prevent disqualification (401(a)(30)). (Otherwise it makes no sense that it is even possible to correct under EPCRS...e.g why would they even tell you how to correct the problem)

with two unrelated companies, and assuming neither plan is in violation, I believe you are correct, there is nothing one can do until another distributable event occurs. see 1.402(g)-1(e)(8)(iii) which says distributions after correction period can only be distributed when permitted under 401(k)(2)(B)

BG5150 1.402(g)-1(e)(2)(i) puts the burden on the individual to notify each plan he is in violation, so depending which plan corrects the problem before April 15, that would be the plan that provides the 1099

If no correction was made by April 15 (e.g. two unrelated companies), there was no distribution, so no 1099.

however, the individual has submitted his W-2s to the IRS, and the IRS is so sophisticated that they will sum up the deferrals indicated and know of the violation. fortunately, they don't have to tell the individual, because the individual was wise enough to also know this and to indicate on the proper line number of his tax form that he did indeed have excess deferrals, and therefore extra income. (This is, by the way, the double taxation. eventually one day he will take a distribution and then pay taxes on that amount a second time)

[Bill Presson]

It's my recollection that your mention of the other distributable event is correct. The other negative is that they still have to get a 1099 for the excess even though they don't get the money. So now those dollars will be taxed twice.

If the deferrals are to two different plans, which ER is responsible for the 1099?

There isn't a 1099, my bad. Tom explains the tax consequences on the individual and thus the double taxation.

[401 Chaos]

I'm not sure this is addressed in the prior discussion but am hoping this might be a relatively simple question: if a 401(k) plan corrects excess deferrals by refunding the excess before April 15th of the following year and the excess deferrals arose because of a payroll glitch (i.e., this was not an issue involving two unrelateed plans / employers), does the correction have to be done in accordance with the SCP requirements of EPCRS or can that more simply be corrected. From the IRS summaries I've seen, it is unclear whether the excess deferrals automatically create a qualification issue that must be corrected per EPCRS or whether you technically only hit the EPCRS corrective procedure requirements (e.g., having to document the correction; documenting plan practices and procedures in place, etc.) if you fail to correct by April 15th. Thanks.