Excess Contribution

For the 12/31/2024 plan year, the client has several unresolved compliance issues from the 2022 plan year that remain uncorrected as of 2025. Specifically, there is a 402(g) excess deferral of $2,000 for Participant A, who is a non-highly compensated employee (NHCE), and a 415(c) excess annual addition of $6,000 for Participant B. Based on the records available, neither of these excesses has been corrected or reported to date.

In addition, another plan has two uncorrected issues from the 2022 plan year related to plan-imposed limits. First, a deferral was made in excess of the plan’s stated deferral limit (as defined in the plan document), separate from the statutory 402(g) limit. Second, the employer matching contributions were calculated at 3.5% of compensation, whereas the plan document limited the match to 3%. This resulted in an excess matching contribution. As of 2025, neither the excess deferral (under the plan-imposed limit) nor the excess match has been corrected — the excess deferral was not returned to the participant, and the excess match was not distributed or reallocated to the forfeiture account.

1. What is the appropriate method of correction under IRS guidance, specifically for each of the following issues: the uncorrected 402(g) excess, 415(c) excess, plan-imposed deferral limit violation, and the excess employer match?

2. What penalties, if any, apply to the plan sponsor for not correcting these issues within the applicable correction window?

3. What are the tax implications for both the plan sponsor and the affected participants upon correction of each issue, including income inclusion, excise taxes, and any other tax consequences?

4. What IRS forms are required to properly report the corrections (e.g., Form 1099-R for corrective distributions, Form 5330 for excise taxes, or other applicable forms)?

Clarification is also needed on whether these issues may be corrected under the Self-Correction Program (SCP), considering the time elapsed and the types of failures involved, or whether a Voluntary Correction Program (VCP) filing is required — particularly for the plan-imposed limits and uncorrected statutory excess.

1 - 402(g) I think now stays in because it was not corrected by 4/15 following the failure. Employee should have picked up the income on 2022 tax return and requested refund. Unless the deposit was wrong and the W-2 shows no excess. Given the other issues you raise might be worth double checking this.

2-415 is qualification issue and needs correction. Probably a refund with earnings but possibly a forfeiture. Read the document.

3 -The incorrect match should be forfeited and used to fund future contributions with an explanation to employees. This might also help reduce or eliminate your 415 issue depending on the magnitude of the match failure and 415 excess.

4 - Check the current Rev-Proc on EPCRS for the acceptable corrections and time frame for self correction v VCP. With expanded IRS guidance you may still be in a widow to self correct.

5 - Refunds if any would be reported on 1099-R and taxable in the year received.

6 - I don't see any failures that would require a 5330 but I might be missing something.

19 hours ago, Lou S. said:

1 - 402(g) I think now stays in because it was not corrected by 4/15 following the failure. Employee should have picked up the income on 2022 tax return and requested refund. Unless the deposit was wrong and the W-2 shows no excess. Given the other issues you raise might be worth double checking this.

2-415 is qualification issue and needs correction. Probably a refund with earnings but possibly a forfeiture. Read the document.

3 -The incorrect match should be forfeited and used to fund future contributions with an explanation to employees. This might also help reduce or eliminate your 415 issue depending on the magnitude of the match failure and 415 excess.

4 - Check the current Rev-Proc on EPCRS for the acceptable corrections and time frame for self correction v VCP. With expanded IRS guidance you may still be in a widow to self correct.

5 - Refunds if any would be reported on 1099-R and taxable in the year received.

6 - I don't see any failures that would require a 5330 but I might be missing something.

 

What is the exact procedure to correct excess contributions of 2022 plan year if the correction is being made in 2025?

https://www.irs.gov/pub/irs-drop/rp-21-30.pdf

https://www.irs.gov/pub/irs-drop/n-23-43.pdf

See Rev Proc 2021-30 section 6.06 for correction of excess.

See Rev Proc 2023-43 for expnaded guidance to see if you are eligible for self correction r need VCP. 

My response to the OP is the same as @Lou S.

4 hours ago, Lou S. said:

https://www.irs.gov/pub/irs-drop/rp-21-30.pdf

https://www.irs.gov/pub/irs-drop/n-23-43.pdf

 

See Rev Proc 2021-30 section 6.06 for correction of excess.

See Rev Proc 2023-43 for expnaded guidance to see if you are eligible for self correction r need VCP. 

@Lou S. Thank you for your time. I’ll review the documents and verify whether my scenario is applicable, along with the relevant correction programs

If the 402(g) excess was also a 401(a)(30) violation, then the plan would have to distribute the excess now in order to correct the qualification failure.

If it was not a 401(a)(30) violation - for example, because the participant exceeded the 402(g) limit only when combining their deferrals in this plan with another plan of an unrelated employer - then that excess couldn't be distributed until the participant has a distributable event from this plan.

In either case, the participant will experience double taxation on the excess; once because it exceeded the maximum they could deduct on their 2022 income taxes, and again when it is distributed.

1 hour ago, C. B. Zeller said:

If the 402(g) excess was also a 401(a)(30) violation, then the plan would have to distribute the excess now in order to correct the qualification failure.

If it was not a 401(a)(30) violation - for example, because the participant exceeded the 402(g) limit only when combining their deferrals in this plan with another plan of an unrelated employer - then that excess couldn't be distributed until the participant has a distributable event from this plan.

In either case, the participant will experience double taxation on the excess; once because it exceeded the maximum they could deduct on their 2022 income taxes, and again when it is distributed.

@C. B. Zeller Is it necessary to calculate earnings through the date the excess contribution is corrected for 402g, plan limit and excess employer contribution and is there any taxation like 402g.

Yes.

Note that for the 402(g) excess deferrals, earnings are only taxable in the year of distribution.  The 1099-R for the year of deferral only includes the actual excess deferral amount, but the 1099-R for the year of distribution would include the amount of the excess deferrals and the earnings (calculated from the date of failure through the date of correction... hopefully there wasn't a loss as losses treated differently).  The distribution of the excess amount contributed due to exceeding the plan limit does not have the same double taxation consequence for the participant but it would include earnings calculated for the period of the failure and the excess amount plus earnings would be taxable in the year of distribution.  Since these distributions are taxable, the 1099-R should indicate they are not eligible for rollover etc.  Also, these distributions may be subject to 72t penalties unless an exception applies, 20% withholding, and spousal consent, if required under plan.   Any forfeiture of matches would include a forfeiture of related earnings calculated for the period of failure.  Of course, any forfeiture of a match is not taxable to the participant and there is no 1099-R reporting requirement.

20 hours ago, Artie M said:

Note that for the 402(g) excess deferrals, earnings are only taxable in the year of distribution.  The 1099-R for the year of deferral only includes the actual excess deferral amount, but the 1099-R for the year of distribution would include the amount of the excess deferrals and the earnings (calculated from the date of failure through the date of correction... hopefully there wasn't a loss as losses treated differently).  The distribution of the excess amount contributed due to exceeding the plan limit does not have the same double taxation consequence for the participant but it would include earnings calculated for the period of the failure and the excess amount plus earnings would be taxable in the year of distribution.  Since these distributions are taxable, the 1099-R should indicate they are not eligible for rollover etc.  Also, these distributions may be subject to 72t penalties unless an exception applies, 20% withholding, and spousal consent, if required under plan.   Any forfeiture of matches would include a forfeiture of related earnings calculated for the period of failure.  Of course, any forfeiture of a match is not taxable to the participant and there is no 1099-R reporting requirement.

@C. B. Zeller@Artie MThank you for the detailed explanation. Could you please point me to the official guidance or provide a reference link that confirms earnings must be calculated from the date of failure through the date of correction? I’d like to use this as documentation to support the correction approach with the client for earning calculation.