Reporting loss on corrective distribution of excess deferral

[Sir LB]

If a participant has excess deferral, and when calculation the gain/loss the participant incurs a loss. I thought the proper procedure was to refund the full amount back to the participant and the loss was reported on the participants taxes.

per the below, I this method might not be correct.

(2007) IRS Publication NO 525 Elective Deferrals

Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you . Include the loss as a negative amount on Form 1040, line 21 and identify it as "Loss on Excess Deferral Distribution".

Please advise if the amount should be reduce by the loss.

[Lou S.]

The excess deferral is taxable in the year deferred.

The loss is deductible in the year received.

Typically this is discovered around now (after year end) and the distribution is made. Say for example the participant has and Excess deferral of $2,000 and a loss of $100.

The participant will receive a check from the plan for $1,900.

He will claim $2,000 as income on this 2015 Form 1040 and will receive a 2016 Form 1099-R for $2,000 with code P. He will not receive this until January of 2017.

He should receive a letter from the plan explaining he had a loss of $100 on the excess deferral. This $100 loss will be reported on line 21 of his 2016 Form 1040 as you indicate above in your post.

Had the excess deferral been discovered in 2015 and the refund with loss of $1,900 been issued in 2015, he would have received a single 2015 Form 1099-R in January 2016 for his 2015 Form 1040 showing $1,900 and code 8, the excess minus the loss since both were distributed in the same year.

Hope this helps.

[Sir LB]

Thank you for your response.

[TPApril]

On 2/18/2016 at 7:52 AM, Lou S. said:

The excess deferral is taxable in the year deferred.

He will claim $2,000 as income on this 2015 Form 1040 and will receive a 2016 Form 1099-R for $2,000 with code P. He will not receive this until January of 2017.

For clarification on excess deferral distributions prior to 4/15 - the 1099-R is issued for the year the excess deferral is distributed, or the prior year when it is taxed?  if it is issued for the year of distribution, then what documentation do they bring the tax preparer for the prior year when it is taxed if they have no formal document?