Deferrals Exceeding 402(g) Limit

We have just found 402(g) violations in a plan for both 2021 and 2022 and wanted to make sure their corrections are handled properly.  The violation occurred to only one participant, the same HCE, for both years, in a 27-life plan (the excess now totals about $6,000).  The violation can be self corrected within three years if it's considered significant, and even longer if it's insignificant - no VCP application is needed.  Is this accurate?  Thanks in advance for any guidance.

Excess deferrals have their own set of rules for the consequences of not taking the excess deferrals out of the plan in a timely manner, so the correction will need to follow those rules.  There also is a difference between the circumstances where the employee had excess deferrals due to amounts contributed to plans of unrelated employers versus when the excess deferrals are due to deferrals made under a plan or plans of the employer or related employers.  The latter required a VCP which I understand can now be self-corrected.

Keep in mind, depending upon the timing of the correction, there will be some unpleasant tax consequences for the participant.

Thank you for your response.  Yes, the unpleasant tax consequences.  I'm aware of the way the excess would be taxed for two years if it's not corrected until after 4/15 of the year following the year of deferral (earnings, too, for the distribution year), and the 10% 72(t) tax since the participant is young.  My biggest concerns are 1) whether or not excess deferrals from years ago that are only now discovered in a takeover can be handled at this time the same way as the 2022 excess can now be handled, i.e., verification that the process is the same no matter how late it's done, and 2) a VCP application is  not needed to refund excess deferrals from two years ago.  The participant is not in any other plans.   

Since there are no other plans involved, this is an operational error under 401(a)(30) and a qualification issue.  Since the 2021 excess was not refunded by April 15,2022, the excess would have been taxable in to the employee in 2021.  Since the employee is an HCE, the plan should have filed a VCP but did not.  The VCP correction likely would have been to make the refund plus earnings, and swear it will not happen again.  The refund and earnings are taxable in the year of distribution.

The same fact pattern exists fro the 2022 excess deferral.  It should have been refunded by April 15, 2023 and apparently was not.  The same taxation pattern is applicable.

So, yes, the same correction method will be applicable although it is because neither excess was refunded by the respective April 15th refund deadline.  Both excesses will be double taxed - once in the year of deferral and once in the year of distribution along with related earnings.

The plan will be following the the same correction process for both years.  The new IRS guidance in IRS Notice Procedure 2023-43 allows for self correction of eligible inadvertent failures which must be done within 18 months from when the failure is identified. 

Hopefully this does not recur for 2023 or the characterization of the failure as "inadvertent" can be called into question.  If the plan is uncomfortable with not having an IRS blessing on the refund because it involves an HCE and is a qualification issue, then the cost of getting comfort is the cost of filing a VCP.

All good points - I forgot about the new 18-month rule.  It sounds like VCP is an option but not required.  Thanks again Paul.