Excess Contribution - Safe Match must be Funded

[Vlad401k]

A 401(k) has only 1 participant - the business owner.

 

The business owner contributed up to the 415 contribution limit in 2025 by contributing $23,500 in Deferrals and $46,500 in After Tax Employee Contributions (which were converted to In-Plan to Roth). However, the plan has a 4% Safe Match (that they fund at the end of the year), which must be funded (but the participant is already at the 415 limit).

 

Which source should the corrective distribution be made from and using which code?

 

Thank you.

[Bill Presson]

The document will specify. 

[BG5150]

I think the 415 corrections are in EPCRS.

[justanotheradmin]

https://www.irs.gov/retirement-plans/fixing-common-plan-mistakes-failure-to-limit-contributions-for-a-participant
 

Step 1: Distribute unmatched elective salary deferral contributions (adjusted for earnings) to the affected participant. If any excess remains, proceed to Step 2.

Step 2: Distribute elective salary deferral contributions (adjusted for earnings) that are matched, and forfeit related employer matching contributions (adjusted for earnings). If any excess remains, proceed to Step 3.

Step 3: Forfeit employer profit-sharing contributions until the annual additions longer exceed the 415(c) limits.

The employer should report the corrective distribution made to the participant on Form 1099-R. The participant should include the distribution as income but does not have to pay the 10% additional tax on early distributions under IRC Section 72(t). The participant may not rollover the corrective distribution to another qualified plan or to an IRA.

The plan sponsor should transfer the forfeited employer contributions (profit-sharing or matching) to an unallocated plan account. These amounts are used to reduce employer contributions in subsequent years.

 

[Vlad401k]

justanotheradmin,

 

Thanks! That's helpful. Do you know if the distribution code will be code 8 or E?

 

Thanks,

[Artie M]

Be careful to note that "unmatched elective salary deferrals" under the IRS fix-it guide would include "unmatched... after-tax and Roth contributions."  A lot of folks take that language to only include pre-tax deferrals.  Especially when reading the examples--they do not include any after-tax or Roth contributions in their facts.

Operationally, the participant should have been limited on his after-tax contributions earlier in the year (since solo 401(k), they should know all the contributions, comp, etc.) so this doesn't occur.  Next year.... Also, because it is a solo 401(k), you really need to know what the document states.  The correction could vary by document provider (Ascensus, Schwab, Fidelity, Employee Fiduciary, MySolo401k, etc.).  As always, first look to the plan/prototype language. 

Assuming the plan document is silent, it seems that EPCRS would point to reducing/distributing the after-tax contributions.  See excerpt from RP-2021-30, §6.06(2) 

The nuance under your facts is there was also an in-plan Roth conversion.  In my experience, most recordkeepers would still process a §415 excess annual addition correction with the distribution coming from the Roth source (plus earnings) attributable to those converted after-tax contributions.  The exact mechanics may depend on the recordkeeper's system (and the plan documents).  

As far as reporting, there is no perfect answer but Code E appears to be the most defensible. This is a 415 correction ultimately.  Code E is for an EPCRS correction.  Code B has some appeal as the source of the distribution will be from the designated Roth account.  However, the instructions for Code B state something like use E for a 415 corrective distribution.  Code 8 seems the least defensible because the distribution is not due to excess deferrals (402(g) fix), excess contributions (ADP fix) or excess aggregate contributions (ACP fix), which is what that 8 is intended to cover.  In case of an audit, we previously have put the following in a file documenting this type of correction:  “The distribution corrects a §415 excess annual addition under the EPCRS correction methodology of Rev. Proc. 2021-30 §6.06. The excess is corrected by distributing the participant's unmatched after-tax contribution amount (plus earnings), notwithstanding that the amount currently resides in a designated Roth account following an in-plan Roth conversion. Reporting on Form 1099-R as Code E is a reasonable and supportable position.”  Caveat though:  make sure the recordkeeper/TPA doesn't have a strong coding convention for Roth-source 415 correction.  If they do, using something different could lead to confusion or unnecessary IRS correspondence if audited.

All just thoughts...

[BG5150]

I think the context of 'after-tax' there is the 'old school' Voluntary After Tax, the stuff that's included in the ACP test, not after tax Roth.

I believe it is an administrative procedure (or it is doc-related?) to determine which goes first:  pre-tax, Roth or pro-rate between the two.  Or is that just for ADP refunds.

[Artie M]

@BG5150  The OP stated the participant contributed after-tax contributions then made an in-plan conversion to Roth.    I agree with you, from a practical standpoint, I think most modern recordkeepers (Empower, Fidelity, Schwab, Ascensus, Principal, etc.) distribute excesses following these rules:

• The plan document or administrative procedures specify the ordering.
• The recordkeeping system calculates the corrective distribution and allocates it between pre-tax and Roth sources accordingly.

Plans typically don't have discretion after the fact to choose whichever source is more favorable.

Here, it seems that the document does not state ordering and the recordkeeper is not offering up a method.

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