Under withheld pretax deductions for prior years

[BN12]

Hello,

I have a gov't client that under withheld employee deductions for a 457 and 414h plan in 3 prior years.  The employee's retirement system received all the correct funds at the correct times but what was under withheld came from the agencies funds instead of the employee's deductions.  When the employee's payback the deductions to the agency, how is this handled for tax purposes?

 

thank you

[Artie M]

I would tell the governmental entity thank you and go on.  But if they pay back the funds, perhaps the "claim of right" doctrine if it is above $3,000 (see IRC s 1341).  

[cathyw]

I would analyze this situation differently.  Under Rev Proc 2021-30 (EPCRS) the correction for a plan sponsor not applying the employee's deferral election correctly (that is, underwithholding) is for the plan sponsor to make a corrective contribution equal to 50% of the missed deferral. (In some cases that corrective contribution is 25% or 0% but it doesn't matter for this purpose.)  In your case, the plan sponsor instead made a corrective contribution equal to 100% of the missed deferral.  There's nothing more to correct.