402(g) Excess When Deferrals Not Deposited

Hi all,

On reviewing a Plan Sponsor's payroll records/W-2s, I've identified that the owner's W-2 reflects total deferrals of $24.5k for 2025 (not catch-up eligible). Normally a 402(g) Excess distributions would be relatively straightforward, but in this case, the 'excess deferrals' weren't actually deposited in the Plan trust (to the tune of $5k, $19.5k actually deposited), which is why our system didn't flag the 402(g) Excess (as it would have on receipt). Let's say this was due to a missed off-cycle processed by the Plan Sponsor just for the owner to contribute these amounts.

Another complicating factor, is their payroll report indicates that they added back a positive after-tax deduction of $1k, labeled appearing to be in order to correct this, so the funds appear to have not actually been withheld from his paycheck, but the W-2 does reflect them as withheld.

In order to correct this, is the only acceptable method to fund the late deposit of the $5k EE deferrals then distribute them with accompanying 1099-R from the Plan Trust?

Is there any other permissible solutions that don't include funding the excess amount, such as correcting the W-2 or issuing a 1099-R (no accompanying payment) reporting the $1k excess as taxable for a pre-4/15 402(g) correction?

If the funds weren't actually withheld and the $1k excess was, in fact, paid to the individual, does any correction (other than possibly the W-2) need to take place at all?

The employer and the plan’s administrator (whether these are the same person or distinct persons) might—after considering each’s lawyer’s, certified public accountant’s, or enrolled agent’s advice—consider whether to check the facts of what happened, including what deferral election the participant properly made, made invalidly, or made not at all.

Might the “off-cycle” not have been compensation from which an actual and proper deferral could be made?

Do the documents governing the plan grant the administrator authority to refuse a participant contribution because it would exceed a deferral limit?

Does a salary-reduction agreement or other form state that the employer will or may interpret a deferral election as limited to the lesser of the amount specified or the largest amount that would not exceed an applicable deferral limit?

Even if not expressly stated in any writing, might the plan administrator’s interpretation of that kind be a prudent interpretation of the documents governing the plan?

To the extent a participant contribution was not sent to the plan’s trust and was not a proper deferral, might the employer make its Form W-2 wage report follow that truth?

Is there time to find the law, plan provisions, and facts with time for the employer to do its wage report by next Monday?

This is not advice to anyone.