Excess Deferral

Hello,

An employee deferred more than 18,000 for 2017 plan year but he is less than 50 years of age at the end of 12/31/2017. How we are going to solve this issues.

Thank you 

mmustafa

the document should contain language such as

(b) Refund of Excess Elective Deferrals. In the event that Elective Deferrals under this Plan when added to a

Participant's other elective deferrals under any other plan or arrangement (whether or not maintained by the Employer) exceed the limit described in the preceding Subsection, the Plan Administrator shall distribute, by April 15 of the following calendar year, the excess amount of Elective Deferrals plus income thereon.

If it is an HCE the excess is included in ADP testing, if NHCE it is not included.

if there is a related match on the excess it would be forfeited.

gains adjustment, etc are treated the same as you would for an ADP failures.

from the Coverage/nondiscrimination answer book 12:14

Excess deferrals should be distributed with earnings to the participant no later than the April 15 following the calendar year in which they were made. The excess deferral is taxed in the year it was deferred, and the earnings are taxed in the year of distribution. Therefore, two 1099-R forms are needed: one reports the excess deferral with a reporting code “P” indicating the distribution is taxable in the prior year; the other reports the earnings (losses), with a reporting code “8” indicating the distribution is taxable in the current year.

.............

The IRS looks at the W-2 so it knows the excess deferral exists so, famous last words, when looking at the W-2 it will adjust things even if the individual doesn't indicate the excess. What is 'confusing' to the individual is the 1099 won't come until the following year even though they need to indicate the amount on this years form, hence the code P

Thank you very much Tom for your quick and detail. This is a partnership plan and they confirm us that the excess amount is the Employer contribution which is funded to Deferral. 

The RK of this plan is American Funds. So, should i show this excess deferral amount as Employer contribution (SH3% nonelective) and instruct AMF to transfer the amount from the respective participants deferral account to SH3% account?

Look forward to hearing from you

20 hours ago, mmustafa said:

Thank you very much Tom for your quick and detail. This is a partnership plan and they confirm us that the excess amount is the Employer contribution which is funded to Deferral. 

The RK of this plan is American Funds. So, should i show this excess deferral amount as Employer contribution (SH3% nonelective) and instruct AMF to transfer the amount from the respective participants deferral account to SH3% account?

Look forward to hearing from you

 

No.  The excess should be distributed to the participant.  You cant leave it in the plan.

Edit:  I just re-read the comment.  If this was an Employer contribution that was mistakenly deposited as a deferral, then yes, you could tell AF to make a transfer to the correct source.

Hello,

In Plan Adoption Agreement i have found the following special rule for Matching Contribution.

"The Employer is authorized to group participants based on Years of Service and to determine a match contribution for each group. Within each group, this match contribution will be allocated as a fixed dollar amount for each participant."

What should be the treatment? 

I will be waiting for the reply.

Thank you

I've never heard of such language before, but that doesn't mean it isn't possible. so lets say I make 2 groups. those with less than 5 years and those with 5 or more years.

It sound like anyone with less than 5 years who deferred gets a set amount of match...e.g. $500

and then anyone who deferred with 5 or more years gets a set amount...e.g. $1000

in addition to the ACP test you also have to run a BRF test.

but maybe someone else has run such a plan before and has a better idea than I do.

of course you could also say 'no match this year"

Can you please explain about BRF test?

lets explain the reason first.

generally, the people with the most years of service would be HCEs, so in addition to the ACP test you run a 2nd test to verify you are not 'favoring the HCEs.

so let's say I have 10 NHCEs, 5 with less than 5 years, 5 with 5 or more years

I have 1 HCE with at least 5 years.

using the example I described above, how many folks could get at least 500?

(It doesn't matter if you deferred or not)

everyone can get at least 500.

so 10/10 NHCEs and 1/1 HCEs so 100%.

now, how many an get 1000. 5 of 10 NHCEs, 1 of 1 HCEs, so ration % of 50%. that fails ratio % test because it is not 70%, but if you can pass avg ben pct test AND safe harbor % based on the NHCE concentration % of 10/11 then you pass the BRF (benefits Rights Features)