Excess Deferral

[thepensionmaven]

Have not had this situation.

Client, through payroll error contributed more than $26,000 for 2021; but took the deduction for only $26,000 and that is what the W-2 shows.

Error most probably made with the last payroll in December, but all deposits for 2021 were made in 2021.

Just because it does not make sense to take the excess out of the plan then put it back in one week later I don't think negates the fact that there was an excess, but it was cured in less than a week.

Still need a 5330 and payment of the excise tax?  

Of course the accountant told the client not to worry about it, leave it alone because it was not an over-deduction, count the contriubtion for 2022, and hope they don't get audited.

[Lou S.]

They made a deposit in error to the participant that wasn't withheld from his paycheck? Sounds like removing it from his account (along with earnings) and using it to offset future deferrals is probably the correct fix.

[RatherBeGolfing]

@Lou S. I think that might work even if it is not "by the book".  A more conservative approach would be to remove as mistake of fact (since it appears it wasn't withheld from participant), or forfeit and use to to offset future employer contributions.

[Bri]

I wouldn't think a 5330 is in order, either. 

Would the argument for one be that the plan sponsor improperly lent that erroneous deferral amount as assets TO the plan?

[thepensionmaven]

This is what happens when most (we used to call them "insurance companies") report - cash basis.

The "excess" was the contribution made for 2020 not credited until 2021.

I think I will do all my plans on a cash basis, much simpler, and saves a whole lot of time this time of year.