Does a personal tax extension extend the 402(g) distribution date?

[BG5150]

Participant has an extension on his personal taxes.  He had a 402(g) violation--he had two jobs in 2018 and deferred $14,000 to each.

Does the personal extension also extend the 4/15 deadline for removing the 402(g) excess?

[duckthing]

Not according to EOB, which agrees with my hazy memory on this:

Quote

1. Corrective distribution of excess deferrals. IRC §402(g)(2) prescribes a mechanism for correcting excess deferrals. Distribution of the excess deferral is the only method of correcting excess deferrals. To avoid additional adverse tax consequences (see 3.c. below), the distribution deadline is April 15 of the next calendar year. For example, excess deferrals for 2012 should be distributed by April 15, 2013. The April 15 deadline is not postponed by extending the employee's federal income tax return. If the individual's taxable year is not the calendar year, the deadline is April 15 following the last day of the taxable year.

 

[BG5150]

Great.  Thanks!

 

[BG5150]

So, if someone missed the 4/15 date.  Do they still have to take the funds out?  Or can they wait until have a distributable event.

[Belgarath]

Can be corrected (including self correction) under EPCRS.  See Appendix A, .04 of RP 2019-19.

[Molly the cat]

Appendix A. 04 of RP 2019-19 says ".04 Failure to distribute elective deferrals in excess of the § 402(g) limit (in contravention of § 401(a)(30)). "

IRC Section 401(a)(30) provides that, for a plan to be qualified, it must provide that the amount of elective deferrals for each participant under all plans of the same employer not exceed the 402(g) limits

Since this employee contributed to plans of two different employers,  I don't think even EPCRS allows for this distribution - because neither Employer's plan exceeded any limit separately.  Yes, the employee still has double taxation (but they would anyway), but the money stays in the plan. 

[Belgarath]

Agree with the Cat. I didn't actually read the original post (careless of me) so didn't realize deferrals were to two different plans.

[JackS]

So you don't get the additional $9000 deduction in 2018 and you have to pay taxes when you do withdraw the $9000....I wonder what negative consequences arise if the additonal $9000 was Roth and the employee isn't getting the deduction now anyway.  What if you have someone contribute 19,000 in roth to two plans of unrelated employers.  Other than the W-2's how or would the IRS notice or respond to that.  Just thinking out loud.  

 

[BG5150]

23 hours ago, Molly the cat said:

Since this employee contributed to plans of two different employers,  I don't think even EPCRS allows for this distribution - because neither Employer's plan exceeded any limit separately.  Yes, the employee still has double taxation (but they would anyway), but the money stays in the plan. 

So, if a person defers $10k into two unrelated plans, they are stuck with the double taxation with no remedy?

[Molly the cat]

They have a remedy if they request a distribution from one of the plans prior to the 4/15 402(g) refund date.  I believe most prototype document providers allow for the participant to request (in writing) a refund from one of the plans when they've exceeded the limit.  Some documents will have a date listed that the participant must request the refund by and the explanation of exceeding the limit when you are in more than one plan is included in the SPD.  Not mine, but I've seen it in takeover documents.

Under EPCRS when the limit is exceeded in just one plan and the refund is completed after the 4/15 due date - the participant is double taxed.  They are taxed in the year that deferrals were withheld & then the year of distribution.  I don't want to think any harder about this, but the fact that the participant didn't take the distribution timely and it's two unrelated plans may work in their favor.  They will be taxed on the excess deferral for 2018, but the double taxation may not happen for years. 

[BG5150]

So, this participant CANNOT take the distribution AT ALL until they have a distributable event?

[Tom Poje]

that would be my understanding since the plans themselves have no disqualifying event

[BG5150]

The BPD says this:

A Participant's claim that the excess was caused by elective deferrals made under a plan or arrangement not maintained by the Employer shall be made in writing and shall be submitted to the Plan Administrator no later than the date specified by the Plan Administrator following the calendar year in which such deferrals occurred.

It doesn't mention anything about the 4/15 deadline.

[C. B. Zeller]

1.402(g)-1(e)(2)(i) "Not later than the first April 15 (or such earlier date specified in the plan) following the close of the individual's taxable year, the individual may notify each plan under which elective deferrals were made of the amount of the excess deferrals received by the plan."

[Tom Poje]

1.402(g)-1(e)(3)(iii) Distribution of excess deferrals after correction period

If excess deferrals (and income) for a taxable year are not distributed within the period described...they MAY ONLY be distributed when permitted under section 401(k)(2)(B)

 

...........

so if it was a single plan involved, plan would be disqualified because it took deferrals in excess of the limit. but EPCRS is there to prevent disqualification.

but when more than 1 employer plan is involved, there is no plan disqualification issue, so no correction needed.

[Molly the cat]

It's looking like you might be using the same document that I do.  The way they wrote it leaves it so that if the participant requests the refund on 4/13, it can be processed.  For whatever reason, they chose not to allow for a date the request needs to be made by into the AA like other documents.  Three paragraphs earlier in the BPD is where it lists the 4/15 date. 

And if you are using the same document as I do, you see what I mean in that it isn't even discussed in the SPD what to do if a participant realizes they exceeded the limit  - so you don't have that to refer the participant to.   The only thing the SPD says is "Federal law also limits the amount you may elect to defer under this Plan and any other retirement plan permitting...."

 

[Mike Preston]

You can use SCP if the request was made timely but not acted upon by the deadline. 

[BG5150]

He notified us about a week ago.