Requirement of Excess Deferral distributed from deferral source?

[Guest andmik]

I think I have an interesting one .... Employee A belongs to Plan A and defers 10,500. Plan B acquires Plan A and Employee A defers $10,000 in Plan B; Plan A is terminated and Employee A initiates a rollover to Plan B.

Can excess deferral come from the rollover source or must the entire $10,000 excess come from the deferral source? Your insight will be appreciated.

[Guest MTransue]

The excess would come from the deferral source, since they had already maxed out their 402(g) in Plan A. Since the excess occurred in Plan B, this is where the refund should occur.

The 402(g) limitation is a salary deferral limit, it should be distributed from the deferral account it originated, not the rollover account.

[Guest Hadden2001]

I have a very similar question and would like to hear what you think.

Employee works for employer A and maxes out his limit in employer A's 401(k) plan. Employee quits and takes position with employer B. Employee wants to max out under employer B's plan because of the generous match that wasn't available under employer A's plan. Before he maxes out, could employee request a direct rollover to employer B's plan and then request a distribution of the excess from the rollover amount. Or, would the excess have to come from the deferrals to his income from employer B (and thus, lose the match) because the amount can't come from the rollover because no part of the rollover could have been considered an excess deferral.

All thoughts appreciated.

[pmacduff]

As MTransue said in the prior post, the first amount deferred went toward the limit, therefore the excess is in the second plan with the match. The participant would lose that match and have a refund of the deferrals. It doesn't matter that the 1st balance was rolled to the second plan. It just won't work!

[Guest shafter]

I understood it was the employee's (or former employee) responsibility to notify a plan they needed money returned and they coud decide which plan paid out the excess. So, they could notify the prior plan to make the payment, thereby, getting the match in the second plan.

[pmacduff]

Well Shafter, I think you may be right. I found the following under code section 402:

(2) Distribution of excess deferrals

(A) In general If any amount (hereinafter in this paragraph referred to as ``excess deferrals'') is included in the gross income of an individual under paragraph for any taxable year—

(i) not later than the 1st March 1 following the close of the taxable year, the individual may allocate the amount of such excess deferrals among the plans under which the deferrals were made and may notify each such plan of the portion allocated to it,

and

(ii) not later than the 1st April 15 following the close of the taxable year, each such plan may distribute to the individual the amount allocated to it under clause (i) (and any income allocable to such amount).

The distribution described in clause (ii) may be made notwithstanding any other provision of law.

The only problem I can see is if the monies from the first plan have already been rolled to the second plan........

Any other thoughts out there?

[R. Butler]

I agree with Shafter, 1.402(g)-1(e)(2) provides that the participant notifies the plan that there are excess deferrals. The regs do not impose a "Last In First Out Rule".

At least in response to Hadden2001, I don't see why the employee couldn't defer under Plan B and collect the better match.

[Guest dmj1998]

i agree with shafter. keep in mind that the 402(g) limit is a personal limit as well as a plan limit. as long as both plans are under the $10.5k limit, then it is only the employee who's got tax problems. i think the regs give individuals enough leeway to designate where the excess should be refunded from - plan A or plan B. As far as coming from the rollover source, if the individual designates plan A, couldn't it be argued that the full amount of the rollover check wasn't really an ERD and has to be refunded?

[R. Butler]

I see several possible problems with an ineligible rollover distribution theory (as an argument to the intial post in this thread):

1. If the money was rolled prior to the time the participant had exceeded the 402(g) limit then it wasn't an ineligible rollover.

2. Even if the money was rolled after the 402(g) problem, the participant never gave notice of the excess. Now that Plan A doesn't exist, it would appear to be too late.

3. Since Plan B acquired Plan A would Plan B be deemed to have notice of the excess? (Maybe a stretch, but a thought.)