Excess Deferral and Allocable Loss

[CO Bank]

I am having a difficult time decoding how to distribute a loss.

We have an employee with a $1,000 excess deferral. (I am using round numbers for sake of ease). We need to return this deferral to him along with any allocable income. Our ERISA attorney states that 'income' means losses as well as gains.

The $1,000 excess was returned via a negative contribution on the payroll account. The rationale was that the w-2 needed to diminish his deferral by $1,000.

The $1,000 deferral he put into his account shrunk to $900 as of the date of return. This $900 was moved out of his account into what we call the negative account at the recordkeeper.

My thought is to now instruct the recordkeeper to move an extra $100 out of the account. This would in effect make the loss realized in his account, and thus would mean the loss was allocated (I think).

Does this approach make sense?

[Lou S.]

Doing it on payroll is incorrect.

The plan should have issued him a check for $900 and issued him the appropriate 1099-R depending on whether this was an Excess Deferral (contribution over 402(g) limit, where the contribution would be taxed in the year deferred but the gain/(loss) taxable in the year received) or an Excess Contribution (for failed ADP test, which would all be taxable in the year received).

[CO Bank]

Let me clarify that this is a 457 plan, and the excess amount was returned prior to 12-31-2015.

More detail: the plan allows a total contribution of $18,000, which is made up of employee and/or employer contributions. The employer contribution was calculated to be such that the sum of the employer contribution and employee contribution would be $19,000. This was how the $1,000 was calculated.

[Lou S.]

Oh, sorry I did not realize this was a 457, I thought it was 401(k). I'll defer to someone else as 457 is not my area of expertise.

[Doghouse]

Perhaps because it's in the 401(k) Forum

[CO Bank]

Sorry about that, will repost to 457 forum.