Deferral in excess of plan's terms

[John A]

The plan year is 9/30/99. The plan document specifies that employees can defer between 2 and 5%. Everyone is within this range except for one employee who earned 165,000.00. He deferred 5% of 165,000.00, and should have been limited to 5% of 160,000. His contribution should have been limited to $8,000, but he contribed $8,250.00. The excess contribution is $250.00.

1. Should the money be a)shown on the allocation report and b) included in testing, or should the money be taken out like it was never there?

2. Does the client have an option to do a 1099-R or W-2, since the 1999 calendar year is not yet over?

3. Should the money stay in the plan and be advanced to the next plan year, or be refunded?

4. Should this be handled through APRSC?

Our thoughts at this point have been:

1). Take the money out of the plan like it was never there 2). Tell the plan sponsor to refund the money to the participant. 3). Give the plan sponsor a choice between issuing a 1099-R, or adjusting the W-2 form.

Thanks.

[Disco Stu]

I'd agree with your thoughts with the exception of one. I don't have any support for this position, other than "I heard it at a seminar..." but I would put this on a 1099R.

Rationale being that the IRS wants to see all money leaving a qualified trust to be reported on a 1099R (see disclaimer above). It also leaves a better audit trail. I'd probably make the 1099 look just like it was a 402(g) excess.