Returning Excess Annual Additions >1 year later

[Gadgetfreak]

John (who is under 50) worked for ABC Company from 1/1/09-2/28/09 and deferred $5,000. He was then hired by DEF Company on 4/1/09 and worked for them though 12/31/09. He deferred $15,000. He terminated with them on 1/2/10.

DEF did all their testing and closed filed their 5500 on time. John calls up DEF on 11/3/11 (over a year later) and tells them that he exceeded his 415 limit (according to his CPA). He still has a balance in the DEF Plan. What does DEF do? Would it be any different if we were speaking about the 2010 Plan Year? What about the 2008 Plan Year (as it would be over two years)?

Thank you.

[Tom Poje]

this does not sound like an excess annual addition, but an excess deferral (e.g. participant deferred 20,000 in a given year)

if I understand the facts correctly

EE worked for 2 different companies.

he deferred 5000 at one and 15000 at another.

neither plan accepted amounts above the 402(g) limit, so neither plan had a disqualifying event.

the employee submits his W-2 when he files his taxes, and the IRS knows he exceeded the limit, so he has to pay taxes on the excess amount.

someday he will take a distribution. at that point in time he will once again pay taxes on that amount. taxed twice because it was not distributed before April 15.

My understanding is that since neither plan has a disqualifying event, there is no required distribution. In fact, unless there is a reason for a distribution the plans can not even make a distribution. (Since he terminated, there is a distributable event).

If this had been caught before April 15 of the correct year, most documents contain language that say "At the participants request, a distribution can be made to correct a violation of excess deferrals". now that it is after the fact, I donm't think you do anything. at least that is my understanding of the rules.

If this had taken place in one plan, then you have a disqualifying event, and under EPCRS you would make the distribution. Regardless, even in that scenario, you end up paying taxes twice.

again, that is my understanding of the rules.

(but then, I'm wearing a pilgrim outfit....)

something like

See John.

See John pay taxes of excess amount.

See John pay taxes a second time on the same amount.

[masteff]

What Tom explained is also discussed on page 10 of IRS Publication 525.