Deferrals taken from ineligible source of compensation

[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.

If not an excess deferral, 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. This would allow us to forfeit the contributions and make the participants whole outside the plan and also avoid the onerous tax consequences.

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

I'd like to self-correct, as this plan has over 1,000 people and the cost of VCP is 15,000 just to submit. This affects 80 out of 1200-1300 active participants, and the amount in involved is miniscule compared to total deferrals.

[QDROphile]

I do not think you are dealing with an "excess deferral" within the meaning of Rev. Proc. 2013-12, nor are you dealing with an ineligible participant. You have a faliure to follow plan terms, and I think that means you have an "excess amount" subject to the following provisions of Rev. Proc. 2013-12 (but you should read the Rev. Proc. yourself to determine what is appropriate, including applicable provisions that are not included below; I have deleted some imbedded images that will not post, so you are looking at an altered copy of the text that might have unintended alternations):

"A distribution of an Excess Amount is generally treated in the manner described in section 3 of Rev. Proc. 92-93, 1992-2 C.B. 505 (relating to the corrective disbursement of elective deferrals ). The distribution must be reported on Form 1099-R for the year of distribution with respect to each participant or beneficiary receiving such a distribution. Except as otherwise provided in section 6.02(5)©, where an Excess Amount has been or is being distributed, the Plan Sponsor must notify the recipient that (a) an Excess Amount has been or will be distributed and (b) an Excess Amount is not eligible for favorable tax treatment accorded to distributions from an eligible retirement plan under § 402©(8)(B) (and, specifically, is not eligible for rollover)."