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Excess deferral across two plans--too late now?


BG5150

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In 2023, EE deferred 7,000 to plan A and 22,000 to plan B.  Neither plan had excess contributions under 401(a)(30).  Nor, individually had an excess over the 402(g) limit.

Is it too late to correct the participant's excess deferrals?

If so, where can I find that language?  I looked in the EOB, but didn't see it.  Is it in the code somewhere, too?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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Yes, it's too late; the deadline is April 15, as per 1.402(g)-1(e)(2). It's probably also in the plan document.

I assume this person isn't eligible for catch-up?

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Sure, they could take an in-service distribution in 2024 (assuming there is a distributable event) but it would be taxable in 2024. Presumably BG is looking for a way to help the participant avoid being double-taxed on the excess, but at this point, it's too late.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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I'm just wondering if they can do an excess deferral distribution at all.


Age 40.  No distributable event.

And if he can't take the distribution, where can I find the backup.  A cite to EOB or the code would be appreciated.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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IRC 402(g)(2)(A)(ii) and treas. reg. 1.402(g)-1(e)(2)(ii)

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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EPCRS says to distribute the money.  However, I'm thinking because EPCRS says "in contravention to 401(a)30" and neither individual plan went over (a)30, we cannot use this method.

And just to be sure, if a participant has their individual tax return on extension, they still cannot make the distribution because the regs say prior to April 15 and mentions nothing about the individual's tax deadline?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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6 minutes ago, BG5150 said:

EPCRS says to distribute the money.  However, I'm thinking because EPCRS says "in contravention to 401(a)30" and neither individual plan went over (a)30, we cannot use this method.

Agreed. EPCRS can let you correct a qualification failure, and 401(a)(30) is a qualification requirement, but neither plan violated 401(a)(30) so there is nothing to correct under EPCRS.

7 minutes ago, BG5150 said:

And just to be sure, if a participant has their individual tax return on extension, they still cannot make the distribution because the regs say prior to April 15 and mentions nothing about the individual's tax deadline?

Also agreed.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Code section 402(g( prohibits an individual participant from making elective deferrals exceeding the annual dollar limit, except to the extent that the participant is eligible to make catch-up contributions. 402(g) applies determines compliance with the annual limit across all plans to which elective deferrals are made, regardless of whether the employers are related. 401(a)(30) is a qualification requirement prohibiting a plan from accepting elective deferrals in excess of the annual dollar limit except to the extent that the participant is eligible to make catch-up contributions and the total of such contributions do not exceed the sum of the regular limit on elective deferrals plus the annual limit on catch-up contributions. Reg. Section 1.402(g)-1(e)(8)(iii) provides: "If excess deferrals (and income) for aw taxable year are not distributes [by April 15th of the taxable year following the taxable year in which the excess deferrals were made] they may only be distributed when permitted under section 401(k)(2)(B)[except to the extent distributed in accordance with correction under EPCRS]."

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You referenced EOB, I am posting an example taken from ERISApedia.  If I am not allowed to post this material on the boards please let me know and I will take down.

Example 9.9.3 Bob, age 48, has his own medical practice, which sponsors a 401(k) plan. He is also an adjunct professor at a local university and participates in the university 403(b) plan. In 2019, Bob deferred $12,000 to each plan. Bob’s excess deferrals are $5,000 ($24,000 minus the 2019 §402(g) limit of $19,000). Presumably, at least one plan will allow Bob to request distribution of the excess deferrals before April 15, 2020. But if he does not make the request, there is no EPCRS correction, because there is no Operational Failure. Neither plan has violated Code §401(a)(31). Bob is taxed on $5,000 in 2019, even without a distribution. He does not acquire basis and is taxed again when the plans ultimately distribute the deferrals.

 402(g) limit violation that occurs in plans maintained by unrelated employers is not an operational error for the plans and cannot be corrected in EPCRS.  In this case, the penalty for distributing after 4/15/2017 is double taxation of the excess by the participant.  Plan A cannot refund the excess after 4/15/2017. The money must remain in the plan. This rule should be in the plan document. Don't take our word for it. IRS website states:

To the extent that a corrective distribution is not made within the correction period, the excess deferrals may not be distributed until a distribution is otherwise permissible under the terms of the plan, or the distribution is necessary to avoid plan disqualification under IRC Section 401(a)(30). Reg. Section 1.402(g)-1(e)(8)(iii) provides that distributions of excess deferrals after the correction period may be distributed from a 401(k) plan only when permitted under IRC Section 401(k)(2)(B). See, IRS Website.

 

EPCRS Appendix A, Section .04, while it doesn't address pre or post 4/15, suggests OK to refund. Do you agree?

No. This is not an operational failure because the employers are not related. The participant may only get a refund if it is a distributable event.  If the limit was exceeded in one plan, the correction would be accomplished in EPCRS Appendix A.04.

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4 hours ago, jsample said:

You referenced EOB, I am posting an example taken from ERISApedia.  If I am not allowed to post this material on the boards please let me know and I will take down.

Example 9.9.3 Bob, age 48, has his own medical practice, which sponsors a 401(k) plan. He is also an adjunct professor at a local university and participates in the university 403(b) plan. In 2019, Bob deferred $12,000 to each plan. Bob’s excess deferrals are $5,000 ($24,000 minus the 2019 §402(g) limit of $19,000). Presumably, at least one plan will allow Bob to request distribution of the excess deferrals before April 15, 2020. But if he does not make the request, there is no EPCRS correction, because there is no Operational Failure. Neither plan has violated Code §401(a)(31). Bob is taxed on $5,000 in 2019, even without a distribution. He does not acquire basis and is taxed again when the plans ultimately distribute the deferrals.

 402(g) limit violation that occurs in plans maintained by unrelated employers is not an operational error for the plans and cannot be corrected in EPCRS.  In this case, the penalty for distributing after 4/15/2017 is double taxation of the excess by the participant.  Plan A cannot refund the excess after 4/15/2017. The money must remain in the plan. This rule should be in the plan document. Don't take our word for it. IRS website states:

To the extent that a corrective distribution is not made within the correction period, the excess deferrals may not be distributed until a distribution is otherwise permissible under the terms of the plan, or the distribution is necessary to avoid plan disqualification under IRC Section 401(a)(30). Reg. Section 1.402(g)-1(e)(8)(iii) provides that distributions of excess deferrals after the correction period may be distributed from a 401(k) plan only when permitted under IRC Section 401(k)(2)(B). See, IRS Website.

 

EPCRS Appendix A, Section .04, while it doesn't address pre or post 4/15, suggests OK to refund. Do you agree?

No. This is not an operational failure because the employers are not related. The participant may only get a refund if it is a distributable event.  If the limit was exceeded in one plan, the correction would be accomplished in EPCRS Appendix A.04.

WRT the bold, is true even if the contribution is after tax ROTH? Was that Example written with Pre-tax deferrals is mind? Did it consider the possibility of ROTH? Maybe it did because the excess is not deductible normally so it would make sense that even though it was ROTH it would later be taxable when it comes out.

That said, how does the plan even know the participant has an excess and if it does know how is it corrected? Do you move the excess (plus earnings) from the ROTH source to a Pre-tax source so it gets taxed when later withdrawn? And which Plan makes the correction? I assume the participant has to be honest and direct one plan to make the correction or otherwise the Plan doesn't know and they see no problem with the $15K ROTH.

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