Deferrals in excess of plan limit

[Guest Serena]

If a participant exceeded the 402g limit for 2009 and the plan failed to distribute the excess by April 15, 2010, what are the consequences? Can the plan self correct under EPCRS to distribute the excess and thus the participant is subject to double tax? Is this a plan disqualification issue or just a contract issue since it is a 403b contract rather than 401k plan.

Thanks

[Guest Matthew Gouaux]

Yes, this can be corrected under EPCRS and the employee would be subject to tax in both the year of deferral and the year of distribution. However, some employers are willing to reimburse the employee for some or all of the additional tax. To answer the other question, according to the Preamble and Section 1.403(b)-3 of the 2007 Final Regulations, this would affect only the employee who exceeded the 402(g) limit; other employees would not be affected. The Preamble says:

if an employee’s elective deferrals under a contract, when aggregated with any other contract, plan, or arrangement of the employer for that employee during a calendar year, exceed the maximum deferral amount permitted under section 402(g)(1)(A) (as made applicable by section 403(b)(1)(E)), the failure would adversely affect the contracts issued to the employee by that employer, but would not adversely affect any other employee’s contracts.

But note that there are a number of ways to cause an entire plan to fail to satisfy 403(b), which is the equivalent of disqualification of a 401(a) plan, including failure to satisfy the universal availability rule or other nondiscrimination requirements, failure to have a written plan, etc.

[Guest Serena]

Thanks!