402(g) Limit Question for Fidelity Recordkeeping Clients

TL:DR--Does Fidelity monitor 402(g) limits for individuals who participate in two unrelated plans if both those plans happen to be recordkept at Fidelity?

I work in an industry that employs highly-compensated people who are often highly-compensated by two employers and are eligible to contribute to two 403(b) plans.   We inform people in a number of ways that the 402(g) limit is a "person" limit as opposed to a separate limit for each plan to which they contribute.  Usually our 402(g) refunds are due to new employees who contributed to both their old and new employers' plans, but I have a case now which I have never seen before.

We received an email from a participant who has two current employers and contributed the max to both plans for the years 2018-2024.   (2018 was the first year she contributed to ours.)  Our advice was "get thee to a tax advisor ASAP" but her response was interesting.  We had previously had our plan recordkept at Fidelity but changed recordkeepers in 2019.  Her other employer's plan is still recordkept at Fidelity and she says that in the past Fidelity had enforced the 402(g) limit because they had access to the salary deferral data for both plans.  She blames her overcontribution on our recordkeeping switch--although that does not explain how she was allowed to defer twice the annual limit in 2018.  

In all my many years in this position I have never seen Fidelity limit any of our participant's salary deferrals based on their deferrals to another plan.  They would give us regular monitoring reports and stop our participants' deferrals when they reached the max in our plan, but never, as far as I can tell, based on activity in another employer's plan.   Fidelity clients, does this make sense to you or is this participant just trying to deflect the blame from her own lack of attention?  I don't imagine this population prepares their own tax returns but I guess it is possible, but it surprises me that a tax preparer or the IRS themselves has not picked up on this before now.

@EPCRSGuru I have worked with Fidelity clients over the years and have never seen where Fidelity monitored the deferral limits for across plans for unrelated companies.

Here are some comments.  There is not requirement for a recordkeeper to monitor deferral limits, unless the recordkeeper wishes to provide that service and includes the service in their service agreement.  I haven't seen any recordkeeper including having such a provision, but someone may have an example of a recordkeeper who does.

The plan has an obligation to apply the salary deferral limits across all companies within a controlled group, and this typically is coordinated within the payroll function. This obligation is under 401(a)(30) and not under 402(g).  Section 401(a)(30) reads:

"(30) Limitations on elective deferrals.—In the case of a trust which is part of a plan under which elective deferrals (within the meaning of section 402(g)(3)) may be made with respect to any individual during a calendar year, such trust shall not constitute a qualified trust under this subsection unless the plan provides that the amount of such deferrals under such plan and all other plans, contracts, or arrangements of an employer maintaining such plan may not exceed the amount of the limitation in effect under section 402(g)(1)(A) for taxable years beginning in such calendar year."

and includes by reference the amount of the limit that appears under 402(g).

The plan does not have an obligation to monitor 402(g) limits which is the deferral limit applicable to the participant. Section 402(g) reads:

"(g) Limitation on exclusion for elective deferrals
(1) In general
(A) Limitation

...
(B) Applicable dollar amount

For purposes of subparagraph (A), the applicable dollar amount is $15,000.
(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 (1) (or would be included but for the last sentence thereof) 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 through the end of such taxable year).

The underlined highlights that is it the participant's obligation to choose which plan or plans will distribution all or part of the excess, and to make sure the excess is removed in a timely manner.  Given the circumstances in your OP, the failure to remove the excess most likely looks as if it is all on the participant.

4 minutes ago, Paul I said:

The underlined highlights that is it the participant's obligation to choose which plan or plans will distribution all or part of the excess, and to make sure the excess is removed in a timely manner.  Given the circumstances in your OP, the failure to remove the excess most likely looks as if it is all on the participant.

Amen to that! I am so sick of people who take no responsibility for their actions, and then try to blame someone else!!

I can’t believe Fidelity would do that even if they could do that.