OOOPS! Missed the March 15th deadline for return of excess deferral.

[Guest mam]

How does the IRS collect the 10% excise tax for missing this deadline? Is it a flat 10% on the amount, or does it increase the longer you are late?

[Guest PLHart]

You need to file IRS Form 5330 to report and pay the excise tax due on any refunds made after 2.5 months after the end of plan year. I believe the due date of the return is 15 months from the end of the plan year for which the refunds applied.

We actually have several clients who prefered to make refunds after 2.5 months from end of plan year knowing that they would owe the tax. The reason they chose to do this is that 100% of the distribution will be taxable to the participant in the year distribution is made making tax reporting for the participant less sticky. When distributions of excess contributions and earnings occur within the 2.5 month period, the excess contribution portion of the distribution is taxble in the plan year in which the excess contribution occured and the earnings portion is taxanle in the year the actual distribution occured. Pretty ugly.

[Guest JimD]

My understanding is if you are correcting an ADP failure by returning excess contributions prior to 2 1/2 months both the contribution and earnings are taxable in the same year.

If you are returning excess deferrals prior to 4/15 because you exceeded 10,000 then the contribution is taxable in prior year and earnings in current year.

[MWeddell]

The 10% excise tax is on just the contributions being refunded, not any associated investment gains or losses.

The Form 5330 is very simple to complete, more like a transmittal form than anything else.

[Guest JWBrown]

This all assumes that the plan year is the calendar year --- if the excess is distributed within 2 1/2 months after the end of the plan year, then the excess and the earnings on the excess are taxable in the year originally deferred. If distributed more than 2 1/2 months after the end of the plan year, then they're taxable in the year distributed. Exception: If the excess, not including earnings, is less than $100, then the whole amount is taxable in the year distributed (even if distributed within 2 1/2 months of the close of the plan year).

If the plan year is not equal to the calendar year, then it gets more complicated.