402(g) in terminating 401(k) plan

[Guest Tbrown]

Here is one I haven't seen before. A 401(k) plan terminates as of 5/1/2010. The ADP test is run and an HCE who had already contributed $16,500 must take back $11,000 of that deferral. He is leaving to go work for another company who has a 401(k) plan with no waiting period. I can find nothing that would allow them to make any contributions to his new company's 401(k) plan. It's a shame, because if he had only contributed a few grand, he wouldn't be having this problem. But he likes to put it all in as early as possible and historically has had to take little or nothing back.

Anyone disagree?

Tim

[Bird]

I think he can just contribute $11,000 to the new company's plan; they don't know about the $16,500 already in. The refund is being processed as an Excess Contribution (failed test) but it's the same code as an Excess Deferral, which it becomes retroactively.

[Guest Tbrown]

It doesn't matter whether or not they know about it. He is going to have $16,500 in deferrals on his W-2 from his first employer. If he then has a W-2 showing $11,000 in deferrals with his second employer, I think the IRS is going to kick it back to him.

[movedon]

I think Bird's point (correct me if I'm wrong, Bird) is that the ADP refund also corrects the 402(g) excess. I believe this is correct and the IRS ('cause they usually do things right) would also see the 1099, and it would all make perfect sense to them.

edited for typo

[Tom Poje]

(lets pretend you know nothing about the new plan, it is handled by someone else)

so the guy goes ahead and defers another 16,500. now what? neither plan is in violation, so neither plan is required to distribute excess deferrals.

the regs give the correction method 1.402(g)-1(e)(2) - but these rules only apply if the correction for excess deferrals occurs after the taxable year.

1.402(g)-1(e)(3) has rules if excess deferrals are corrected during the taxable yaer, but these rules only apply for plans of the same employer.

so now you are in la-la land as far as I can tell - there are no regs for the situation you describe.