Inelig HCE deferred - how to correct (& tax)?

[AlbanyConsultant]

Complete brain freeze here...

The calendar-year safe harbor plan has a 12-month elapsed time eligibility to defer, and the owners hired their daughter in August 2017... who deferred $5K in 2017 (and more in 2018 so far, of course).  We got the 2017 annual data yesterday.

Going "by the book", what's the right ordered solution here; what is violated "first"?  My first thought is that she violated her 'personal 415 limit' and that it has to be distributed to her and is taxed in the year of distribution, but that seems way too easy.  Also, I'm remembering something about double-taxation under 402(g)...?

Thanks.

[Lou S.]

I believe that is correct. You refund the deferrals and earnings and forfeit any related match.

1099-R code is E. I believe it is taxable in year distributed but I don't know if there is any formal guidance on this. It is not a 402(g) violation so there is no double taxation to worry about.

What I am not sure of is whether this falls under SCP or VCP is required.

 

[C. B. Zeller]

This sounds like a pretty clear case of an operational failure - a participant was allowed to contribute before satisfying the plan's eligibility criteria. As long as it's corrected before the end of the second plan year following the plan year in which the failure occurred (i.e., before the end of 2019) then I don't see any reason why SCP wouldn't be allowed.

I agree with Lou, you should adjust the contributions for earnings and return them to the participant with code E.

[ERISAAPPLE]

What is the code for exceeding the 402(g) limit?

[Lou S.]

45 minutes ago, ERISAAPPLE said:

What is the code for exceeding the 402(g) limit?

It depends when it is processed.

If you catch it before 12/31 and process the distribution, the code would be 8.

If you catch it after 12/13 and process it between January 1 and April 15 you would use code P.

[chc93]

Sorry, can someone tell me what "personal 415 limit" is in this case...

 

[ERISAAPPLE]

When I read the question I assumed it is talking about a 403(b) plan where the participant, such as a professor, sponsors his or her plan in a separate business, etc.

[chc93]

18 minutes ago, ERISAAPPLE said:

When I read the question I assumed it is talking about a 403(b) plan where the participant, such as a professor, sponsors his or her plan in a separate business, etc.

Thanks... I don't know much of anything on 401(b) plans...

[Luke Bailey]

My guess is the reference to "personal 415 limit" is an unintentional red herring, the questioner thinking that perhaps the daughter could defer $0 because she had no valid compensation under the plan. But as C. B. Zeller points out, the problem seems to be simply failing to follow the plan document, which in this case can be fixed in EPCRS self-correction as described.

[AlbanyConsultant]

Sorry - by 'personal 415 limit' I meant that since the daughter's max limit is the lesser of her eligible compensation or $55K, then in this case it would be $0.  Upon re-reading that, yeah, I was unclear.  Nothing to do with 403(b) here.

Thanks, everyone.