Taxation on "late" 402(g) Excesses

[BG5150]

I have a plan that had deferrals taken from an ineligible compensation (overtime).

One correction under consideration is refunding the overages (plus investment experience). This would be considered an excess deferral. This happened in 2013.

Because we are past April 15, how is the distribution taxed? Is it earnings in 2014 and excess in 2013 AND 2014?

Or did things change and everything is taxable in 2014?

[Lou S.]

Do I understand he did not exceed the 402(g) limit, just had deferrals on ineligible pay? I don't think this is technically an excess deferral that needs to be refunded by 4/15 but rather a different form of correction. Is this an EPCRS correction of some sort?

[BG5150]

Lou,

What correction is it then? It's either an excess deferral (as defined by the code or a plan limit) or what?

We were thinking of being aggressive going down the "ineligible participant" route, in that deferrals were taken from an ineligible source of income.

Some people in my office just think we should correct moving forward, let the participants know what happened and move on.

(I'm going to copy this into the Plan Corrections Forum to properly place it.)

[Tom Poje]

I agree with Lou, I don't see it as an excess deferral, you haven't exceed a limit. you have a failure to follow the terms of the document, so fix it so the plan is back in a position it should have been if the error had not occurred.