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Correction of Underpayments


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This is for a 457(f) Plan.

We made several payouts, but miscalculated earnings which resulted in underpayments.  As you would expect from a 457(f) Plan, vesting and payment occurred the same year, so FICA and income tax would have all been applied in the year of distribution.  

Some of the underpayments occurred in the last year or two and we could, potentially, correct under 2008-113.  But some are older.  For those we correct under 2008-113, the correction is pretty clear.  For those that we cannot, what are our options?  We prefer not to report the underpayments as 409A violations because that would cause major issues for the affected participants, when the miscalculations are not major (at least not in relation to total benefits for these participants).  Can we just correct past W-2s and leave it at that?  Can we make up the underpayments and then issue 1099s in the current year?  Any help is much appreciated.  If I'm missing any relevant information, please let me know.

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Worth asking -- what if these are small amounts?  Is the IRS really going to make a participant's entire benefit subject to a 20% excise tax just because the earnings calculation was off by $20 and it is too late to use the 2008-113 correction procedure?

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  • 3 weeks later...

I'll take a stab at this in a purely non-advisory way.  If you go by the proposed income inclusion regulations from Dec 2008, I suppose you can argue that those payments that were properly included in income do not factor into the 20% additional income tax or underpayment penalty, and you are generally only going back 3 years to the last open tax year to run the calculations.  Correcting a past W-2 with a different Boxes 1, 3 and 5 should be triggering the need to refile, and the obligation of box 12 code Z reporting falls to the employer.

So, is there anything in the documents that can interpret the missed earnings payments as forfeited?  Paying a CPA more than the additional taxes due seems ridiculous.

 - There are two types of people in the world: those who can extrapolate from incomplete data sets...

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