Confusion on ADP refunds

[bzorc]

It has always been my contention that a refund of excess contributions, due to an ADP test failure, plus earnings or losses thereon, are includible in the year of contribution if refunded before 2 1/2 months after the close of the plan year end.

I have an associate who asserts that an ADP refund is treated like a refund for an excess deferral; that is, the contribution is taxed in the year of contribution, while the earnings are taxed in the year of distribution.

Has anybody seen or done refunds like this? I was totally surprised when my associate mentioned this.

Thanks for any assistance!

[Spencer]

you are correct. If refunded within 2 1/2 months, they're taxable (contributions and applicable gain/loss) in the first year in which they could have been deferred. After 2 1/2 months, they're taxable (contributions and gain/loss)in year distributed.

The only exception is if the excess contribution (NOT including gain/loss)is less than $100, then it's always taxable in year distributed.

Refer your associate to the instructions for the Form 1099-R. Here's a link to IRS website where you can dowload instructions http://www.irs.gov/forms_pubs/forms.html