Reporting excess deferrals with a loss in year of contribution

[KaJay]

In a 403(b) plan, we have a participant that exceeded the 2018 402(g) limit by $84. Since the time of the deposit, he has had a loss of $3 on the $84. There is some confusion as to what we send back to him and what is reported on 1099-R. Do we issue a check for $81 and report $81 on the 1099-R? Do we send him $81 and report $84 on the 1099-R? Do we issue a check for $84 and report $84 on the 1099-R since that is the amount he exceeded the limit by? Or something else? TIA for your comments.

[Tom Poje]

my notes indicate there are a couple of issues

Under a special de minimis rule, however, if the total amount of the excess deferral is less than $100 (excluding income), the distribution is taxed in the year it was distributed. Only one 1099-R is issued for the year of distribution. The taxpayer is responsible for reporting the excess deferral in the year it occurred

(Though for the life of me I can't find where I have that note from - though they might be bad notes and should only apply to ADP/ACP failures, though it does seem consistent with late corrections under EPCRS)

If the excess deferral is after 4/15 I have the following notes from some old Relius notes:

Example. A participant deferred $16,575 in her 401(k) account in 2011. The 402(g) limit was $16,500 for 2011. The statutory correction method is to distribute the $75 before April 15 of the calendar year following the year the excess arose. The plan would issue a 2012 Form 1099-R. If the corrective distribution does not occur by that deadline, the plan is subject to disqualification and the participant is subject to double taxation.

Assume the plan fails to correct the excess deferral by April 15, 2012, and therefore seeks to correct this failure under the self-correction program in EPCRS. Since the excess amount is $100 or less, no distribution of the $75 excess amount is required. The employer must send the participant notice that the $75 is not eligible for tax-favored treatment, including that it is not eligible for rollover. Additionally, the plan must track earnings on the $75 until the participant takes a distribution of the excess amounts. The participant decides to leave his money in the plan for 30 years. Finally, when the participant withdraws his full account balance, the plan administrator must issue two Forms 1099-R, one reflects the rollover amount and the other reflects the $75 plus earnings over 30 years. The corrective distribution may not be rolled over. Note: Tracking the excess amount would not be practical so the better correction would be a corrective distribution when the employer discovers the error.

http://www.relius.net/News/TechnicalUpdateDetails.aspx?T=P&1=1&ID=941

 

publication 525 has the following: 

Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Include the loss as a negative amount on Form 1040, line 21 and identify it as “Loss on Excess Deferral Distribution.”

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I tried a search and back in 2010 I posted the following:

if I understand the rules correctly, if there was a loss then the world stops, hell freezes over, planets collide and all other sorts of strange things happen. you end up reporting the loss as 'other income on your tax form. no 1099R for the loss and everyone gets confused as to what happens. you send the person a note signed by mom saying you can report the loss. or something like that. I looked it up once and tried to erase it from my memory but it is still partially buried there.

　

　

 

[Belgarath]

Tom - was this maybe the old 401(k) regs that were modified by TAMRA (1988) which provided such a de minimis rule for excess contributions and excess aggregate contributions that were distributed within the first 2-1/2 months? I think it was 1.401(k)-1(f)(4)(v)(B) way back when...?

[Luke Bailey]

Treas. reg. 1.402(g)-1(e)(5) states that the allocable income is equal to the "allocable gain or loss." So the answer is $81, i.e. the cash and the 1099-R. Of course, he or she paid FICA on $84, and that is still the correct amount for that. You're not going to issue a W-2c.

[KaJay]

Thank you!