Processing Excess Contributions

[Below Ground]

As a practice, we always try to discourage plans from using "payouts on demand" for termination, especially for HCEs. Waiting until after the close of the year of service termination is the plan design we recommend, when possible.

Of course the one Client that decided to ignore that advice is the one that has an ADP Test failure where the person due a distribution of excess contribution has already rolled out 100% of his account balance. They want the person paid almost when the person walks out the door!

Any advice on how to correct a rollover of excess contributions to an IRA would be much appreciated. Thanks!

[ErisaGeek]

The participant and the IRA custodian needs to be informed the excess amount not eligible for rollover to IRA. The participant simply needs to withdraw that amount from the IRA and subject it as part of his income in the year the excess is withdrawn.

The 10% penalty would not apply to the participant even when the excess is withdrawn from the IRA. Code Sec. 408(d)(5)(B)

Now if the participant does not act on it there is nothing else the plan can do but keep this documentation on file. But I would also send something to the IRA custodian like stated above because the IRA custodian should at least put some pressure on the participant to have the excess withdrawn from the IRA.

[Tom Poje]

I hadn't thought about this before, but a bell just rang in the head and I guess if things are done properly, he gets 2 1099s

one for the excess and the rest for the rollover.

thus at tax time he pays the taxes on the excess.

now, if he hasn't returned the excess then what happens when he eventually takes the $ out of the IRA?

in other words, is the IRA keeping track of the basis?

maybe telling them that will increase the pressure to get this done properly.

[Lou S.]

If you look in the instructions for the 1099-R the IRS lays out some pretty easy to follow and detailed instructions for what the PLAN should to do when this situation occurs. I think the heading is "Corrective Distribution Following Total Distribution" of something similar.

[Below Ground]

Thanks for the replies. Very helpful, indeed!