Late 402g refund

[Karoline Curran]

There is a participant who exceeded the 402g limit in 2017 by $98.18.  What is the fix now that so much time has gone by?

Thanks!

[Tom Poje]

according to EPCRS (self correction)

you simply distribute the excess plus earnings (otherwise plan is subject to disqualification, assuming this is an excess not caused by participant in 2 different plans)

Appendix A

.04 Failure to distribute elective deferrals in excess of the § 402(g) limit (in contravention of § 401(a)(30)). The permitted correction method is to distribute the excess deferral to the employee and to report the amount as taxable in the year of deferral and in the year distributed. The inclusion of the deferral and the distribution in gross income applies whether or not any portion of the excess deferral is attributable to a designated Roth contribution (see § 402A(d)(3)). In accordance with § 1.402(g)-1(e)(1)(ii), a distribution to a highly compensated employee is included in the ADP test and a distribution to a nonhighly compensated employee is not included in the ADP test.

NOTE:

even though the participant didn't receive a 1099 for the excess, when they filed taxes their W-2 would show an excess, so they should have paid taxes on that amount in 2017. now they receive the distribution and a 1099 (form for 2018) and they pay taxes a second time.

EPCRS

section 9

.04

example 1

During the 2008 plan year, the Plan Sponsor made QNECs on behalf of the excluded employees, distributed the excess deferrals to the affected participants, and made a top-heavy minimum contribution to all participants entitled to that contribution for the 2006 plan year. Each corrective contribution and distribution was credited with Earnings at a rate appropriate for the plan from the date the corrective contribution or distribution should have been made to the date of correction.

[Karoline Curran]

Thanks. I didn't know if there was something else because I'm late in doing it.

[Tom Poje]

nothing else. the reason it is permitted is because otherwise the plan would be disqualified, and the IRS gives an opportunity to correct the problem

the example was for a 2006 plan year, so it is even later than your situation!

[DMcGovern]

Similar situation, except the participant DID participate in two different employer plans.  Participant notified current employer on 4/16 that he over-contributed over $4000 in deferrals.  Our client's plan did not exceed the section 401(a)(30) limit.  What is the correction?

The participant is a non-highly compensated participant.  How is the excess treated for testing purposes - not counted in ADP test?  counted as an employer contribution for 415 purposes?

Thanks in advance for your help!

[Tom Poje]

neither plan is in violation, so no correction required. and after April 15 you normally can't distribute because there is no 'distributable' event in regards to the plan

the person files his taxes and the W-2 indicates he has an excess, so he will be taxed on that amount.

When he takes the $ out at tax time he will be taxed again. if it is Roth $ you have to segregated the amount because he needs to be taxed on the earning on the excess as well, otherwise you could intentionally make an excess and earn tax free interest

I think the whole amount is included in testing because there is no violation of 401(a)(30) by the plan, but I could be wrong.

[DMcGovern]

Thanks for your help, Tom!