401k plan - ineligible employee deferred and got refund

[Jakyasar]

Hi

Not a 401k expert

401k plan with 3% NESH+PS

An employee erroneously was allowed to defer in 2021 as never met eligibility.

Got the refund timely, I am told

Totally excluded for 2021, correct?

Thank you

 

[CuseFan]

correct

[401kology]

Agree, if they never met eligibility that applies to both 401k and SHNEC

[Jakyasar]

Thank you both.

A hypothetical follow up.

Say, you found this out in September after the plan year end and it was not corrected at all. The employee filed their return with the assumption that he/she deferred. He/she also received 3% NESH.

What happens now?

[Bri]

The SH gets forfeited with its earnings.

The employee's 1099-R for the refund (should be code E for an EPCRS correction) would determine what year it's taxable.  Typically they're taxable in the year they get them back, even if that's a different year from the original deduction shown on their W-2.  So maybe they end up taxed at their 2022 marginal rate rather than their 2021 rate.