457(f) correction

[Guest jmlumpkin]

457(f) plan allows for a contribution to an employee's account equal to a certain dollar amount less the maximum amount that may be contributed to the 457(b) plan that is also in place. It appears as though the organization inadvertently credited the employee with the dollar amount and failed to reduce it by the 457(b) amount that was also contributed. Is this excess contribution a problem since the amount exceeds the amount outlined in the plan document. What is the proper correction procedure for a 457(f) plan? Also, due to short term deferral exception, plan is not subject to 409A.

[jpod]

I'd have to see the plan/agreement governing the 457f arrangement, but presumably the "crediting" should be a meaningless act because there is only informal funding. In other words, it's still the employer's money, and the employee is entitled to what he was supposed to have credited plus/minus earnings/losses on that amount, not the extra amount plus/minus earnings/losses. So, no "correction" is necessary, but the employer will probably want to withdraw the excess from the account in question.

[Guest jmlumpkin]

I'd have to see the plan/agreement governing the 457f arrangement, but presumably the "crediting" should be a meaningless act because there is only informal funding. In other words, it's still the employer's money, and the employee is entitled to what he was supposed to have credited plus/minus earnings/losses on that amount, not the extra amount plus/minus earnings/losses. So, no "correction" is necessary, but the employer will probably want to withdraw the excess from the account in question.

What if the excess benefit has already been paid out to the employee? For further clarificationthe benefit vested in 2011 and was paid to the employee with 90 days of the vesting date. Can we correct by having the employee return the excess amount or if they simply pay tax on the amount is that alright?

[jpod]

I don't understand your questions. Doesn't the employer want to get the money back? If so, and it gets it back this year, I believe it can handle its 941 and W-2 obligations in a fashion that would zero out any tax liability of the employee and any employment tax liabilities. Getting it back next year presents more complex tax issues.

If the employer doesn't want to bother getting the money back, then what's the problem?

[Guest jmlumpkin]

I don't understand your questions. Doesn't the employer want to get the money back? If so, and it gets it back this year, I believe it can handle its 941 and W-2 obligations in a fashion that would zero out any tax liability of the employee and any employment tax liabilities. Getting it back next year presents more complex tax issues.

If the employer doesn't want to bother getting the money back, then what's the problem?

I just wanted to make sure it wasn't a problem that the employee received more than the plan document stated, as long as everything is taxed properly, and that there was no requirement that the employee return the excess funds.