415 excesses--why deferrals first?

[BG5150]

I always wondered why the correction of 415 excesses start with deferrals. It seems like it's punishing the participant and helping the employer.

1) It is increasing the participant's taxable income for the year.

2) It takes out fully vested money and leaves in partially vested money.

3) It allows the employer to take a larger deduction

Any ideas why they made it that way?

[mbozek]

I always wondered why the correction of 415 excesses start with deferrals. It seems like it's punishing the participant and helping the employer.

1) It is increasing the participant's taxable income for the year.

2) It takes out fully vested money and leaves in partially vested money.

3) It allows the employer to take a larger deduction

Any ideas why they made it that way?

prevent plan from being DQed on account of excessive employer contributions since salary reductions are voluntary employee contributions

Revenue gains from taxing refund of excess is higher at individual tax rates because all excess contributions will be taxed whereas many plan sponsors do not pay taxes (S corp, P ship, non profit) on contributions or are taxed at lower rate than individuals.

[K2retire]

From the perspective of the participant -- keep more of your own money to get more employer money.

[Tom Poje]

on the other hand, from the participnats point of view:

and lets say the 415 limit was 10000.

and the deferral was going to be 10000.

new participant.

he defers 10000 and doesn't pay taxes yet so has a 10,000 balance.

now instead the company puts in the 10000.

participant pays, lets say 20% in taxes so now has 8000 in his pocket.

plus he has 10000 in his account.

I'd say the participant comes out ahead to the tune of 8000.