Excess deferral question

We have a tax client (not a TPA client) who is a participant in her medical K plan and a hospital 403(b) plan.  Turns out her deferrals for 2024 between the plans are $10,000 over the 402(g) limit.  

My understanding has always been (and confirmed by ChatGPT) since not corrected by April 15, the amount is taxable for 2024 and in the year distributed.  But also that it must be distributed and I assume as reasonably soon as discovered.

Someone else here asked CoPilot and it says it does not have to be distributed but is taxable whenever it is. 

Comments?  We all know we need to check AI for correctness.  I have more confidence in this group than AI at this point. 

Thank you,

Tom

Consider also which plan pays a corrective distribution. Your client might have a preference.

If neither plan had a 402(g) violation on its own then neither plan has an obligation to distribute without direction from the participant, who is the party responsible for informing either plan, as desired, to distribute. The excess should trigger 2024 taxation on filing that return and yes, missing the 4/15 deadline subjects the excess to taxation again. I'm not aware of any subsequent distribution timing but delaying serves to increase the attributable earnings and you're always looking over your shoulder for when the IRS catches up with you. 

I seem to remember that if a participant has 402g excess from 2 unrelated employers, once the April 15 deadline is missed the money cannot be returned. That's the double taxation of being taxed in the year it was made, then taxed again when it it ultimately distributed once a distributable event occurs.  I am not aware if that rule was recently changed.  I am not clear if the medical K plan and the hospital 403b plan represent unrelated employers from the original post.

From ERISApedias text book (which I highly recommend--I found this in no time using their AI feature!).

Corrective Distributions After April 15. If excess deferrals (and income) for a taxable year are not distributed by April 15, the taxation and distribution rules change drastically. First, distribution of the excess deferrals is not permitted after April 15 unless a normal distributable event under Code 401(k)(2)(B) (i.e., age 59-1/2, hardship, termination of employment, or disability) occurs. Second, for tax purposes, undistributed excess deferrals are treated as if they were proper elective deferrals when contributed. This means that they are taxable income to the participant when they are distributed. The effect of these rules is that uncorrected excess deferrals are taxed twice: first in the year of deferral and then when distributed. Excess deferrals that are not distributed by April 15 also are treated as employer contributions for purposes of Code section 415 when they are contributed to the plan. [Treas. Reg. section 1.402(g)-1(e)(8)(iii)]

Example: Suppose that Roberta (from the prior example) did not receive a distribution of her excess deferrals before April 15, 2018. The excess deferrals would remain nonexcludable in 2017, and would be part of Roberta’s taxable income in that year. The $2,500 excess that was already taxed may not be distributed from the plan to Roberta until she experiences a normal distributable event under Code section 401(k)(2)(B).

In 2022, Roberta attains age 59½ and can take a distribution of elective deferrals from the plan. If she removes the $2,500 at that time, it is taxable income in 2022. (The exemption from including the distribution of excess deferrals in income that existed if the distribution is taken by the following April 15 evaporated when the distribution was not timely made.) As a result, Roberta is effectively taxed twice on this amount – once in 2017 and once in 2022.