excess deferrals rolled to IRA

[30Rock]

Participant deferred $7000 over the 402g limit last year 2013. She terminated and rolled her account over to an IRA. Not sure why recordkeeper did not monitor this excess but in any event, what is the procedure for recordkeeper and plan at this point? Issue participant a letter notifying her of excess and that she should contact IRA to take it out. Is there an April 1 deadline? Do the double taxation rules apply if not distributed from the IRA by 4/15?

Thanks for any help!

[ETA Consulting LLC]

If the excess occurs in the single plan (or plans of a single employer), then I could see where the participant's payroll should've stepped in the preclude the excess. However, this can easily happen when someone changes jobs during mid-year and do not instruct the payroll department of their new employer to limit deferrals.

This leaves us unclear on exactly how we would approach the correction as we are not clear on the exact fact pattern of how the transactions took place. For instance, if all contributions were made to a single plan, then the recordkeeper could simply reflect part of the distribution as a 402(g) correction and the other part as a rollover. You'd then reach out to the IRA custodian to advise that part of the funds rolled were excess amounts not eligible for rollover.

At the end of the day, there would never be a situation where an individual who acts now would be subject to taxation. It's just a matter or working with the various parties to ensure everything is properly reported for tax purposes. There may be several ways to do this.

Good Luck!

[Appleby]

Speaking on the IRA side...the employer should notify the employee.

The employee should then notify the IRA Custodian and request to have the amount removed as a 'return of excess' contribution ( the excess amount plus any net attributable income- NIA). The deadline to remove the amount is the IRA owner's tax filing due date for the year the amount was deposited to the IRA, plus extensions. If the amount is not removed by this deadline, a 6% excise tax will apply for every year the amount remains in the IRA.

Double taxation ( which would usually apply if the amount was not corrected by the deadline) would not apply because the rollover is due to erroneous information provided to the participant/IRA owner