Participant defers $20,000 into two unrelated 401(k) plans ($10,000 in

[Richard Anderson]

A participant defers 10,000 into two diferrent plans for a total of 20,000 for a calendar year. The two plans are not part of a control group or affilated service group.

If this was a control group, I believe one or both of the plans could be disqualified if the excess deferral is not distributed. But, since this is not a control group, and neither plan allowed deferrals over 10,000; neither plan can be disqualified.

My question is; can the excess deferral be distributed, or must it be distributed? Or, must the distribution be postponed until some other distributible event occurs?

[R. Butler]

The excess deferral must be distributed. The plan document should have provisions covering this exact scenario. The excess deferral should be distributed by April 15 following the close of the taxable year in which the deferral arose. If excess deferrals are not timely distributed, the amount of the excess deferral will be included in the employee's gross income not only in the year in which it arose, but also in the year of distribution.

[John A]

The excess deferral must be distributed, and the participant must inform the plan that the participant wants the distribution from. Failure to distribute the amount by April 15 following the year of deferral will cause double taxation to the participant - taxed on the excess in the year it was deferred and in the year it is distributed. And if the amount is not distributed by April 15, then the amount cannot be distributed until a "distributable event" occurs. The excess could not be distributed after April 15 and before a distributable event under a correction program like APRSC because, as you note, the plans do not face disqualification for this issue. So the distribution is only a "must" from the standpoint of the participant avoiding double taxation. Anyone else agree or disagree?

[Richard Anderson]

John A

Your analysis is exactly what I think the situation is, but I wanted confirmation.

Neither of the plans could distribute before April 15 without notification from the participant. After April 15, I don't think there is any authority to make a distribution of excess deferrals, unless a disqualifying defect occurred. If the excess caused a disqualifying defect, then the plan could correct under EPCRS by distributing the excess plus earnings.

But in the absence of a disqualifying defect, I think the excess deferrals must stay in the plan until a distributible event occurs.

However, this does not seem like a reasonable outcome. If someone knows of authority for distributing excess deferrals after April 15 when no operational defect has occurred, please post here.

Thanks.

[david rigby]

If we are talking about deferrals in 2000, there may be way to fix it. Most payroll systems and 401(k) recordkeeping systems will recognize negative deductions/deferrals. May be possible to apply such to one (or both) plans so that the total deferrals by 12/31/00 are 10000. Note that this is probably the EE's problem, hence EE's task to fix it, since it is not the responsibility of the unrelated plans.

[Richard Anderson]

It is 1999 deferrals.

[R. Butler]

I would disagree that there is no authority to distribute deferrals after 4/15. Under the IRS standardized VCR procedures the appropriate correction for failing to distribute excess deferrals is to distribute the amount to the employee. The employee should include the amount in income in both the year it was deferred and the year it was distributed.

[Richard Anderson]

R. Butler

Can SVP be used when there has not been a disqualifying failure?

[R. Butler]

SVP is only available for specified operational failures. So whether or not you colud use SVP does depend on circumstances. Every document I have seen has a provision stating something to the effect that the participant can notify the Plan by March 1 (and I am fairly certain IRS regs extend the deadline to 4/15) that are excess deferrals. The notified Plan would then have to distribute such deferrals. If the Plan was properly notified, in a timely manner, but did not make the distribution you have an operational failure.

The key questions for me are:

1. Does the document have such a notice provision?

2. If #1 is yes, did the participant give notice in a timely manner?

I would also add that this can be self-corrected using the SVP correction method.

[Richard Anderson]

R Butler

Reply to Questions:

1. The document has such a provision

2. The participant gave no notice

The only reason that we even know that the participant deferred into two different plans is that we administer both plans. However we noticed it well after April 15.

[R. Butler]

If the Plan did not have timely notice I would agree that the SVP correction method cannot be used. It was worth a shot, it can be a bear to keep track of the excess deferrals and the related gains separately.

[John A]

Why would either of the plans need to keep track of the excess deferrals and the related gains separately at this point?

[R. Butler]

The excess deferrals and the gains on them are not eligible for rollover. If the Plans never knew probably not a problem, but now it appears they do know.

[John A]

Good point. But is either plan sponsor responsible for tracking excess deferrals when the participant has not notified either plan that there has been excess deferrals? In the specific case discussed, does a TPA have a responsibility to notify the plan sponsors and/or plan participants that excess deferrals exist, but in which plan will not be known until the participant notifies the plan(s)? Is the participant responsible for keeping track of the excess deferrals and earnings up to the time of payment, or up to the time of notifying the plan(s)? Are you aware of any guidance on the participant's responsibiliy in the case where the participant has not notified the plan in time for the distribution by April 15?

[R. Butler]

John A

The participant is definitely responsible for tracking the excess deferrals in this case. I don't really know whether or not has a duty to notify the Plan. Even if there is not such a duty, I'm concerned even about potential lawsuits. Even if the TPA isn't liable, he/she may still have to defend themselves at some point.

[Richard Anderson]

I agree that a "corrective" distribution of excess deferrals and earnings are not eligible for rollover. But, if the excess is not distributed as a correction, but is distributed 10 or 15 years later when a distributible event occurs, is that distribution eligible for rollover? I seem to recall that "corrective" distributions are not eligible for rollover. Since this would not be a corrective distribution, then I think it is eligible for rollover. Also, if the excess deferrals are not eligible for rollover, which plan is required to keep track of the excess and earnings?

[R. Butler]

The excess deferrals will still be a "corrective distribution" regardless of when it occurs. You stated that at least one of the plan documents does allow the participant to allocate the excess to that Plan. If both documents are the same the participant should be able to choose.

[MR]

Once April 15th has passed, what benefit would the participant have in removing the extra $10,000? Remember its not that one cannot contribute more than $10,000, rather that one cannot exclude from income more than $10,000. Assuming he only excluded from income $10,000, he's already stuck paying tax twice on the second $10,000, no matter when he takes it from the plan.

[david rigby]

Generic question for Dave Baker (and anyone else who cares to comment):

The post above from Appleby contains a fairly lengthy quote from copyrighted material. Is it OK to post such on this board?