402g limit and unrelated plans

[Mr Bagwell]

I am swirling in a little confusing.

We have a employee that is in two unrelated plans that we administer.  Because we administrate both plans, I can see that he deferred 24,000 in Plan A, and 350.00 in Plan B.

My original thought was to distribute the 350.00 as a 402g error and be done with it.  (We did email the employee and let him know the error)  But, being the deferrals are in two unrelated plans, am I needing direction from the employee?  What's the deal with the March 1 deadline in the plan document?

What if I never knew the 350.00 deferred to Plan B?  I'd move forward like normal....

Do I cut a check for 350 plus earnings, issue 1099-R for 2017 and be done with this?

What are your thoughts?

[ETA Consulting LLC]

Since they are two unrelated employers, there is no 401(a)(30) violation; which is the application of 402(g) to a single employer.  Hence, there is (technically) no harm to the plan and it is incumbent on the participant to recognize that he won't receive the full deduction.  He, as an individual, gets only the 402(g) limit.

Good Luck!

In other words, you don't do a thing without the participant's direction.

[401_noob]

+1 for what ETA said, but I believe that the participant is supposed to tell the Plan Administrator which plan to distribute the excess from.

[Mr Bagwell]

That was the conclusion I was coming to when reading the EOB....

Thanks

[Mr Bagwell]

That begs the question.  What if the participant does nothing?  I suppose he would have to be caught......

[Lou S.]

If he does nothing he can still only deduct $24,000 on the tax return but the full $24,350 will be taxed when it eventually leaves the plan of IRA.

Presumably this is some thing the IRS would catch on the return but who knows for sure.

 

[Tom Poje]

there is no where on the tax return you indicate how much you deferred. But the IRS has your W-2s, so something should kick out at their end there is an excess deferral and the person is taxed on the $350 for the year the taxes are filed.

Then someday years from now the person will take a distribution and be taxed again on the $350. simply out of luck

as indicated above, neither plan violated any rule so the plans are ok. If you are talking about 2016 it is probably a bit late to make any correction for the participant.

[david rigby]

1 hour ago, Tom Poje said:

there is no where on the tax return you indicate how much you deferred. But the IRS has your W-2s, so something should kick out at their end there is an excess deferral and the person is taxed on the $350 for the year the taxes are filed.

Tax software might find this (I've never verified).

[Tom Poje]

why I remember this is beyond me, because I don't remember much of anything on the old tv game shows, especially only seeing it once (unlike a tv series)

on the old Match Game show the 'fill in the blank'

My cousin in so cheap. To prepare his taxes he didn't use H & R Block. instead he used _________

and the contestant answered

H & R Blockhead   (I doubt that software would find excess deferrals!)

as I recall he didn't get any matches, but everyone was laughing so hard anyway it didn't matter.

[XTitan]

I think it's likely that tax software could find the excess deferrals since the entire W-2 gets entered/downloaded, including the Box 12 codes, so it's just adding Code .  I used tax software that found I had excess FICA.

[NJ Mike]

Here are the IRS Form 1040 instructions:　

line 7

Excess salary deferrals. The amount deferred should be shown in box 12 of your Form W-2, and the "Re-tirement plan" box in box 13 should be checked. If the total amount you (or your spouse if filing jointly) deferred for 2016 under all plans was more than $18,000 (excluding catch-up contribu-tions as explained later), include the ex-cess on line 7.

So, I would think if you input items accurately, the software would determine any excess deferral. 

Mike

[Luke Bailey]

As NJ Mike points out in last post, the IRS service center is supposed to pick up the aggregate excess deferral across all unrelated employers from the multiple W-2's and the individual is taxed on the excess in the year of deferral and in the year of distribution (because you don't get basis for what was taxed in the year of deferral). The only way out for the individual is to obtain a distribution of the excess by April 15 of year following year of deferrals. The plan document is not required to provide for distribution of excess deferrals, but most do, if requested, and of course the individual needs to understand the rules, identify each of the plans that he/she deferred into and which will distribute excess amounts, allocate excess to one or more plan(s), and request distribution sufficiently in advance of 4/15 that the distribution will be made by then. Of course, in determining which plan(s) to allocate the excess to the individual will most likely want to choose the plan with the lower(est) match.

[401_noob]

Isn't there also something about including the excess amount from the distributing Plan in the ADP test if the participant is HCE? I seem to recall something like that but i may be mixing it up with something else.

Thanks!

[david rigby]

Back to the original post: the record-keeper knows about the "402g problem" only as a coincidence.   That, by itself, does not necessarily lead to action.

• Does the record-keeper/TPA have any responsibility to speak up?  to whom? 
• Could the record-keeper/TPA be in violation of a service agreement by speaking up?  by not speaking up?

[Tom Poje]

if it is before 4/15 deadline I would say at the minimum he should inform the participant of the consequences, and thus getting the $ out of one of the plans. If after that date, warn the participant to watch out this year. since neither plan is subject to disqualification, I don't see the burden on his shoulders much more than that.

I'm assuming this is a participant who defers the max every year so should be aware of such things anyway, and if the IRS didn't catch something as obvious as that by adding the W-2s... 

[Luke Bailey]

We include this in an Appendix to our SPDs, with pretty detailed instructions. I don't think there would be a fiduciary duty to reach out to the participant, but it wouldn't hurt to do that, except that whenever you interact with a participant there is risk of misunderstanding, mistake, etc.