402(g) excess - if caught prior to end of plan year, can it be corrected through payroll?

An employee works for two unrelated entities in 2022 (not in controlled group or ASG). He approaches the second employer to advise that due to contributions to his prior employer's 403(b) plan, he has now exceeded the 402(g) limit.  Since it is before the end of the plan year, is it permissible to move the excess contributions & attributable earnings to the current employer's 403(b) plan's suspense or forfeiture account and refund the contributions to the participant through payroll, or is it required to process a corrective distribution from the plan? 

Sorry, this is in the 401(k) topic, but it's for a 403(b) plan - I would think the answer would apply to either plan type.

The correct way would be for the participant to request a 402(g) refund and process from the Plan along with earnings with the Plan issuing the associated 1099-R.

I suppose it is possible to "correct through" payroll but I don't think it is an IRS approved method. So make sure you are comfortable defending this course of action if you propose it. I'm sure that would "easier" for everyone involved, I'm just not sure it's the correct method even if it produces essentially the same result with less paperwork.

I would not forfeit and correct through payroll. It is not the correct method and a forfeiture from a salary deferral account throws up a red flag. Also, the excess is required to be adjusted for investment experience as Lou noted.

1 hour ago, CuseFan said:

I would not forfeit and correct through payroll. It is not the correct method and a forfeiture from a salary deferral account throws up a red flag. Also, the excess is required to be adjusted for investment experience as Lou noted.

I agree.  The only time I would forfeit a "deferral" would be when the correct amount was withheld but too much was deposited.  In that case it is simply employer money that ended up in the participants account.

Because this is a 402(g) issue, I would suggest following the EPCRS correction that specifically addresses section 402(g) failures, which is generally to process a corrective distribution. There is some complication because the 402(g) issue resulted from the participant's failure (failing to coordinate between multiple employers' withholdings) rather than a plan administrative error, but I don't think that changes the correction approach endorsed under EPCRS. 

I note, however, that EPCRS does not address the correction for a plan administrative failure whereby more is withheld from a participant's paycheck than the participant elects (within the 402(g) limit). In that context, it would make sense to analogize to the 402(g) correction and process a corrective distribution. However, an arguably more conservative correction approach would be to move the excess amounts to a forfeiture account and have the employer pay the employee the error amounts plus earnings on the side (e.g., through payroll), based on the EPCRS general principle that a correction should generally keep assets in the plan, when possible, while still placing the participant in the position they would have been in had no failure occurred. 

I would distribute https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-werent-limited-to-the-amounts-under-irc-section-402g-for-the-calendar-year-and-excesses-werent-distributed#:~:text=The limit on elective deferrals,of–living adjustment table.)