402(g) excess for partner

[R. Butler]

Plan sponsor is taxed as a partnership.  Plan sponsor uses a recordkeeper platform for their 401(k).  A few of the partners had 401(k) contributions that exceeded $24,000 deposited to their accounts during 2016.  It wasn't noticed until after 04/15.  

Since they are partners and not W-2 employees can this be  corrected by forfeiting the excess amount?  Just trying to avoid the double taxation; potentially they can be made whole outside of the plan.

Thank you for any guidance.  

[Bird]

I hate to use the term "forfeiture" for something that's not.  I'd be comfortable taking that money (plus earnings) from their account and reallocating it as an employer contribution, to them and/or others.   Not so comfortable putting it into a forfeiture account and not reallocating it.

[R. Butler]

Do you see an issue with reallocating as a 2017 contribution? 

 

 

[Lou S.]

1 hour ago, R. Butler said:

Do you see an issue with reallocating as a 2017 contribution? 

 

 

Depends. Was it made in 2016 or 2017? If it was deposited in 2016 I don't see how you can do it as a 2017 allocation.

[Bird]

16 hours ago, Lou S. said:

If it was deposited in 2016 I don't see how you can do it as a 2017 allocation.

Agree

[Tom Poje]

just curious how much excess are you talking about?

if you were $1000 over and had 30% taxes that would only  be $300 for the 'second tax' somewhere down the line.

you talk about 'forfeiting' the $1000 and making the guy whole outside the plan.

why not just make him whole based on the amount of taxes he has to pay the first time?

seems like it would be less and certainly nothing done under the table trying to beat the system.

[R. Butler]

7 hours ago, Tom Poje said:

just curious how much excess are you talking about?

if you were $1000 over and had 30% taxes that would only  be $300 for the 'second tax' somewhere down the line.

you talk about 'forfeiting' the $1000 and making the guy whole outside the plan.

why not just make him whole based on the amount of taxes he has to pay the first time?

seems like it would be less and certainly nothing done under the table trying to beat the system.

 

Probably will just refund it as a 402(g) excess for simplicities, but it is not really a question of trying to beat the system.   It is a question of whether a self employed can really have a 402(g) excess.  The money isn't withheld from a paycheck as it would be with a W-2 employee, It just contributed  out of  a draw.  If this money were in a brokerage account and the 401(k) and employer money isn't tracked separately at the investment level I would have no issue doing exactly what Bird suggested.  The only difference is that this in a record-keeper account and two partners called it a 401(k) contribution so that is the source record-keeper used.       

The total excess is about $4,000 so somewhere around $1,500.  Not a huge amount, but still why pay $10 more than you have to?    

The only reason why Bird's solution may not be feasible is that there 10,000 participants in the plan.  That is might be difficult to allocate.

 

Thanks for all of the answers.

[Bird]

16 hours ago, R. Butler said:

Probably will just refund it as a 402(g) excess for simplicities, but it is not really a question of trying to beat the system.   It is a question of whether a self employed can really have a 402(g) excess.  The money isn't withheld from a paycheck as it would be with a W-2 employee, It just contributed  out of  a draw.  If this money were in a brokerage account and the 401(k) and employer money isn't tracked separately at the investment level I would have no issue doing exactly what Bird suggested.  The only difference is that this in a record-keeper account and two partners called it a 401(k) contribution so that is the source record-keeper used.  

Yes, I think a partner can definitely have a 402(g) excess.  If it is deposited to the deferral account, and it's too much, then it's an excess.

Having said that, if the plan does have room for profit sharing or match or whatever and that "excess" could fund the other contribution for the partner, I'd have no problem telling the recordkeeper to just move it to another bucket.  If it's intended to be a 401(k) only plan, then I think you you are stuck with it being a 402(g) excess.

[Tom Poje]

agree you could have excess as well

agree, you defer on the draw. what if at the end of the year you have no compensation? the preamble to the regs even speak of that. yes, you can defer, but you need to make sure at the end of the year you actually have comp sufficient for the deferrals