415 violation for S/E

I'm a little bamboozled on this one. Schedule C income is, say, $2,000. Owner "defers" and deposits $19,000 in December of 2024. Accountant tells her she has to distribute it, and Fidelity transfers it to one of her personal accounts, and tells her there are no tax implications whatsoever.

Now, I don't see how this can be classified as anything other than a 415 excess, to be corrected under EPCRS. Excerpt from 2021-30, Section 6.06(2).

Excess Allocations that are attributable to elective deferrals or after-tax employee contributions (adjusted for Earnings) must be distributed to the participant. For qualification purposes, an Excess Allocation that is corrected pursuant to this paragraph is disregarded for purposes of §§ 402(g) and 415, the ADP test of § 401(k)(3), and the ACP test of § 401(m)(2). If an Excess Allocation resulting from a violation of § 415 consists of annual additions attributable to both employer contributions and elective deferrals or after-tax employee contributions, then the correction of the Excess Allocation is completed by first distributing the unmatched employee’s after-tax contributions (adjusted for Earnings) and then the unmatched employee’s elective deferrals (adjusted for Earnings).

Normally, this distribution adjusted for earnings would be taxable. But, since it isn't deductible in the first place, is she only taxed on the earnings, if any? 

I assume the $2,000 is the Schedule C tenative P/L prior to the $19,000 deferral, which is why the accountant is requiring her to distribute the funds. Assuming so, then the Excess Allocation would be $17,000 plus earnings/losses. Both the 415 and 402(g) limits would be $2,000. I don't understand why Fidelity states that the $17,000 plus earnings/losses is not taxable income for 2024.  

Thanks. I'm struggling with the tax implications. Suppose the $17,000 excess deposit, which wasn't deducted,  came from a personal savings account. Wouldn't this represent non-taxable basis, so that only the earnings, if any, would be taxable? Seems like double taxation otherwise.

Yes, the $17,000 should never have been placed in the qualified trust. It has a full taxable basis of $17,000 and returning it plus earnings to the personal account is not an income tax transaction by itself.  The "earnings" on the $17,000 would be subject to the normal income tax rules and would be appropriately reported on the 1099-INT, etc...

Gracias!!