Net c is lower than expected for a new 401k plan

[Jakyasar]

A new one for me

Client has an existing fully funded DB plan.

For 2022, I was told that the schedule c income would be 60k.

Suggested a new 401k set up for 2022. Did so and deposited full deferral prior to 12/31/2022.

I just got the net c and it is $600 (thankfully db has no required contribution).

So, now have a 27k deposit as of 12/31/2022 but no income to support it.

What to do?

[FORMER ESQ.]

Argue "mistake of fact" under Rev. Rul. 91-4 interpreting ERISA Section 403(c)(2)(A): The schedule C income was calculated incorrectly (i.e., there was a mathematical error) which caused the 27K contribution in error. Return the 27k minus the $600 (or whatever amount they can defer from compensation under the plan). Need more facts to paint a full picture, but this would be my first line of defense.

 

[Jakyasar]

Thank you but will use it as last line of defense and after giving the client the option.

[Bri]

It's not just fixable as 415(c) excess?

[Tom Veal]

Yes, all but $600 is an annual addition in excess of the section 415(c) limitation.  Rev. Proc. 2021-30, Appendix A.08, provides that an excess annual addition caused by elective deferrals can be corrected by refunding the excess, adjusted for attributable income.  There's no need for a "mistake of fact" argument.

[Lou S.]

This is what distribution Code E was made for on the 1099-R.