When someone exceeds the 402(g) limit, is it necessary to reduce the l

[Guest Joanne Blythe]

I am new to the 403(B) world and have a question regarding the return of excess deferrals when someone exceeds the 402(g) limit. Is it necessary to reduce the lifetime to date amount to reflect the amount of the return? I have not been successful in locating the answer to this question.

[Guest gaaberggillespie]

Check out IRS Publication 571, page 5. Any excess contribution must be included as taxable income in the year in which the excess was made AND it must be included in the exclusion allowance calculations for future years.

You might want to check to see if the contribution can be permitted under any of the alternative TSA methods available.

[Guest Harvey Carruth]

The reference to Page 5 of IRS Publication 571 made by Gloria Gillespie deals only with "employer contributions" that exceed the IRC 415©(1) dollar and compensation limits. "Employer contributions" should be interpreted as "annual additions," and it is true that annual additions that exceed the 415©(1) limit must be counted as "amounts previously excludable" in exclusion allowance calculations for future years.

However, the situation remains unclear with respect to treatment of excess elective deferrals, as discussed in the previous section on Page 4 of IRS Publication 571. The original question posed by Joanne Blythe deals with excess elective deferrals, not excess annual additions. Moreover, the original question refers to "the return of excess deferrals."

It is interesting to note that nonforfeitable contributions that exceed the 403(B) exclusion allowance are not counted as "amounts previously excludable" in exclusion allowance calculations for future years. This claim is supported by the example found in IRS Regulations 1.403(B)-1(g).

Hence, it would seem that several questions remain unanswered with respect to the more general question: "How are excess deferrals, annual additions, and nonforfeitable contributions treated in exclusion allowance calculations in subsequent years?" Even more interesting is a related question: "What if the excesses have been corrected by one of the available correction methods in the Code, Regulations, and/or Revenue Procedures?" For example, if "excess amounts" are corrected by distribution as explained in Rev. Proc. 2000-16 [and in the newer Rev. Proc. 2001-17], then they are not treated as amounts previously excludable in exclusion allowance calculations during the year of corrective distribution or in subsequent years.

[Guest Joanne Blythe]

Thanks so much for your help!