Reporting 402(g) Excess of Designated Roth Deferrals After April 15

Plan Type:  403(b)(9) Non-electing Church Plan

Background: Participant (under age 59.5) contacted the plan in May 2025 because his tax professional told him he did not have enough includible compensation to support the amount of Designated Roth 403(b) deferrals he made in 2024. For purposes of my question, he only made Roth deferrals to the plan and these excess deferrals totaled $5000, and there were $100 in earnings on that excess.

Questions: Since the distribution will occur after April 15, 2025, there is some confusion as to how it is to be reported on the 2025 1099R. IRC § 402A(d)(3) seems to instruct the payer to tax the participant on the full distribution, not just the earnings portion, when distributed after April 15 (which seems counter intuitive).

IRC § 402A(d)(3) states the following:
(3) Treatment of distributions of certain excess deferrals
Notwithstanding section 72, if any excess deferral under section 402(g)(2) attributable to a designated Roth contribution is not distributed on or before the 1st April 15 following the close of the taxable year in which such excess deferral is made, the amount of such excess deferral shall—
(A) not be treated as investment in the contract, and
(B) be included in gross income for the taxable year in which such excess is distributed.

Q1: Referring to the highlighted text, does this mean that the 1099R should be written as follows:

Box 1: $5100

Box 2a: $5100

Box 5: (blank)

Box 7:  1, 8  (assuming no known exception to early distribution)

Q2: Does withholding apply to this distribution? (I think not)

As always, thanks in advance for your responses!

Look at Treas. Reg. 1.402(g)-1(e)(8)(iv)

Under 401A(d)(2)(c), the “qualified Roth contribution program” rules, a “qualified distribution” does not include any distribution of any “excess deferral”, or any income on the excess contribution or the excess deferral.

The treatment of excess designated Roth contributions is similar to the treatment of excess deferrals that are attributable to non-Roth elective deferrals. Thus, if excess designated Roth contributions (including earnings) are not distributed by the applicable April 15, then those contributions (and the earnings thereon) are taxable when distributed.

Based on the quoted statute in your post, though it may look counterintuitive, the result is that if the excess deferrals are attributable to a designated Roth contribution and are not distributed by the April 15 following the tax year in which the deferrals were made, then neither the elective deferral nor the distribution is tax-free.

Note, just like regular excess deferrals, the participant will not get a distribution of these amounts until the participant has a distributable event under the terms of the 403(b) plan.  The Plan will not distribute the excess deferrals after April 15 just because they are excess deferrals, they will only be distributed if the participant, for example, severs services

My first question would be were not the Roth Deferrals withheld from the wages?  How would they withhold more than wages paid?

Secondly, IF those deferrals exceeded 100% of compensation, then it would be a 415 violation, not a 402g unless the person had large deferrals elsewhere in 2024.

3 hours ago, David D said:

My first question would be were not the Roth Deferrals withheld from the wages?  How would they withhold more than wages paid?

Secondly, IF those deferrals exceeded 100% of compensation, then it would be a 415 violation, not a 402g unless the person had large deferrals elsewhere in 2024.

Agreed, this sounds like 415 excess rather than 402g if its because there wasnt enough comp to defer from.  

@KaJay forget comp for minute, did the deferrals exceed $23,000 (and catch-up if eligible)?

@RatherBeGolfing The deferrals did not exceed the $23,000 limit. 

Since my earlier post, we have a bit more information related to his contributions: 

• 2024 Total EmployER [non-matching] contributions: $5,520
• 2024 Total EmployEE Roth contributions: $5,520
• 2024 Total Taxable [includible] Income: $2,633

It has been decided that the special employER contribution limit [IRC Section 415(c)(7)], that allows the employer to contribute up to $10,000 beyond includible compensation, will be applied to help reduce the excess.

Below is what I think may need to occur to ultimately establish the extent (and type) of excess:

1.    First we apply the employEE contributions received up to the includible compensation limit ($2,633).
       a.    This means the 2024 employEE contributions are in excess of $2,887  (plus any earnings related to that amount)
2.   Second, the special limit allows for employER contributions (up to $10,000) even though the includible compensation was used up by the employEE contributions.
       a.    We can apply this special limit to 100% of the employER contributions that came into the plan in 2024 ($5,520).
       b.    Because the employER contributions are not in excess, the excess is limited to a 402(g) excess.

On 5/16/2025 at 4:03 PM, Artie M said:

Note, just like regular excess deferrals, the participant will not get a distribution of these amounts until the participant has a distributable event under the terms of the 403(b) plan.  The Plan will not distribute the excess deferrals after April 15 just because they are excess deferrals, they will only be distributed if the participant, for example, severs services

Questions related to quote above (any reference to the IRC is appreciated!):

Q1: Is the delay in distributing the excess deferrals based on it being after April 15? 

Q2: For excesses that are not distributed prior to 4/15, does the participant simply get a 1099R for 2024, taxing him on the excess plus earnings, but the deferrals actually stay in the plan until he requests them (and has a distributable event)? 
 

On 5/17/2025 at 12:50 PM, David D said:

My first question would be were not the Roth Deferrals withheld from the wages?  How would they withhold more than wages paid?

Secondly, IF those deferrals exceeded 100% of compensation, then it would be a 415 violation, not a 402g unless the person had large deferrals elsewhere in 2024.

@David D The participant is a minister with designated clergy housing allowance. His housing allowance for 2024 was $8,400.

On 5/16/2025 at 4:03 PM, Artie M said:

Thus, if excess designated Roth contributions (including earnings) are not distributed by the applicable April 15, then those contributions (and the earnings thereon) are taxable when distributed.

On 5/16/2025 at 4:03 PM, Artie M said:

Note, just like regular excess deferrals, the participant will not get a distribution of these amounts until the participant has a distributable event under the terms of the 403(b) plan.  The Plan will not distribute the excess deferrals after April 15 just because they are excess deferrals, they will only be distributed if the participant, for example, severs services

@Artie M 

Q1 - If the excess amount plus earnings will not be distributed until the participant becomes eligible at some unknown time in the future, is the plan required (or is it a best practice) to reclassify the excess Roth amounts as pre-tax within the plan now? If not, it seems like it could be administratively messy.  

Q2 - I understand that we are not to send the excess plus earnings back to the participant without a distributable event.
        a. Does this mean we let the funds stay in the plan indefinitely?
        b. What does fixing this 2024 deferral excess look like operationally from start to finish? Meaning, other than recoding the Roth as Pretax now, is there anything special that occurs? It would seem that when the funds are distributed in the future, it will just look like a regular distribution.
        c. If the funds were pre-tax to start, what would change operationally?

@KaJay

Thanks for the clarification. So it sounds like the tax professional has determined this individual is an an employee and not a self employed individual.  Again, for 415 purposes the plan limit is 100% of plan compensation.  If there was no other income other than the housing allowance, this is a 415 violation of 100% of compensation. IRC Section 402(g) limits the amount of retirement plan elective deferrals you may exclude from taxable income in your taxable year, which is generally the calendar year. Your 402(g) limit for 2024 is $23,000 (2023 is $22,500; 2022 is $20,500; etc.).  If the only compensation for plan purposes is zero, then there is no compensation to defer any money into roth or pre tax

Since they are allowing up to an additional $10,000 in EMPLOYER contributions, the employer contribution can stay, but the entire deferral and earnings are disallowed.  This  remains roth as you cannot change roth contributions to pre-tax contributions after the fact.  It's been a while since I encountered this, but I think the $10,000 amount you are referring to is a lifetime limit, not a per plan year limit. 

The last time I ran into 415(c)(7) was many years ago.  This may simply be for my own education but it seems like this is a 415 excess annual addition, which would make life easier.  My understanding is that 415(c)(7) gives the special catch-up provision for church plan employees of up to $10,000 per year.  @David D My understanding is that this is an annual limit but there is a $40,000 lifetime limit of "additional" annual additions that may be given under this provision to an individual participant.   If there are annual additions in excess of this special limit, I thought they were considered excess annual additions.  I know that somewhere in 415(c) it states that the term "annual additions" is the same for purposes of (c)(7) so that limit still limits both employEE and employER contributions (with the employEE contributions being the Roth contributions).  I guess I am unaware of a provision in (c)(7) or elsewhere that requires the excess annual contributions that are employEE contributions to be treated as 402(g) excess deferrals.  Sorry if I am being dense.

@David D

He had taxable income of $2,633.

The $10,000 is an "up to" annual limit. The lifetime limit is $40,000.

@KaJay  Sorry, I missed that on your update.  @Artie M  Has been years for me as well. I don't believe it is ever a 402g failure, but a 415 failure.

As to whether the special $10,000 can be a combination of EE deferral and ER contributions I do not know. If it can, then there is no 415 violation. If it cannot, then the excess 415 limit is the roth deferral over $2,633 as the tax person suggested.

I believe 415 limit excess must be refunded by the December 31 following the plan year, so you would have until December 31, 2025.

Okay... so I am reading (c)(7)(A)(i) which states in part " contributions and other additions for an annuity contract or retirement income account described in section 403(b) with respect to such participant, when expressed as an annual addition to such participant’s account, shall be treated as not exceeding the limitation of paragraph (1) if such annual addition is not in excess of $10,000."   (c)(7)(D) states that "For purposes of this paragraph, the term “annual addition” has the meaning given such term by paragraph (2)." The facts provide:

• 2024 Total EmployER [non-matching] contributions: $5,520
• 2024 Total EmployEE Roth contributions: $5,520
• 2024 Total Taxable [includible] Income: $2,633

So it seems to me the annual additions are $11,040 ($5,520 + $5,520) as the (c)(7) includes "contributions and other additions" and annual additions as defined in (c)(2).include both employer and employee contributions.

If this is the case, the excess annual additions appears to me to be $1,040 ($11,040 - $10,000).  Then due to ordering of corrective distributions/forfeitures for excess annual additions under 2021-30, s 6.06, $1,040 of the Roth contributions are to be distributed (by the deadline David D states).  The corrective distribution would be reported on Form 1099-R,  included in income, no 10% additional tax, and not rollover eligible.

Since the participant had includible income of $2,633 they only used $7,367 ($10,000 - $2,633) of the $40,000 lifetime limit under (c)(7) and has $32,633 of their lifetime limit remaining, which can be used in later years.... in case this keeps happening.

The regs have some additional rules and examples under 1.415(c)-1(d) but they only include employer contributions so they do not address this situation which includes the employee Roth contributions.  

Again, all of this is just my thoughts and reading the language of the statute.

@Artie M  Thanks for the additional research.  I am still wondering though if the $10,000 excess that can exceed the 415 limit now would mean $10,000 plus the regular 415 limit of$2,633 for a total allowable amount of $12,633.  Then the amounts contributed would be below that.

@KaJay@Artie M  Good morning!  I thought about this some more. On a PLAN LEVEL, I believe the 415 limit is $12,633 so on a plan level no issue.

On a PERSONAL level, I agree with the tax professional, you can't have a deferral in excess of your income for determining your deferral.

@David D @Artie M  Thank you both for your responses and additional research. It is greatly appreciated!