Penalty tax on return of ineligible deferrals

[BG5150]

I have a plan that had some people defer early. I am planning on distributing those deferrals & earnings.

Does the under 59 1/2 penalty tax apply?

[ETA Consulting LLC]

I would distribute the deferrals, but forfeit the earnings. To distribute the earnings would be for a non-participant to benefit from the plan.

Good Luck!

[Tom Poje]

well

according to

an ASPPA presentation at the Mid Atlantic the following choices are available:

(I did not attend, only have a copy of the notes. since the distribution to the employee was in italics, I assume this is something new, and will be part of the new EPCRS, whenever that will be released, but I am only guessing- but i do seem to recall the IRS saying you could distribute the deferrals)

Correction methods under EPCRS:

1.Amend plan retroactively to permit employee to enter.

Make the employee whole either by:

1.Forfeit deferrals and earnings to plan and make employee whole outside the plan.

2.Distribution of deferrals to ineligible employee.

Distribution of Deferrals of Ineligible Employeeon GUST document

Return of deferrals and earnings. [Tom says this includes earnings, despitet he fact it seems like a windfall. must be because if the plan lost $ then how would you handle?]

Taxed in year returned to employee.

Issue Form 1099-R with a Code 8. [Tom looked it up and thats the code for excess deferral, so I guess no 10% penalty]

ADP test would need to be redone if the ineligible amount was included in it.

Any associated match would be forfeited.

[TPAMan]

No 10% early withdrawal penalty on return of ineligible deferral.