402(g) Excess not subject to withholding?

Looking over a Return of Excess form from a large record keeper.  In the tax withholding section it says (paraphrasing): if the distribution is on account of 415, ADP or ACP, then 10% withholding will apply unless otherwise indicated below.

Then it goes on to say (quoted): Excess deferrals (402(g)) are not subject to withholding. (emphasis mine)

Is that right?

11 minutes ago, BG5150 said:

Excess deferrals (402(g)) are not subject to withholding. (emphasis mine)

Is that right?

Yes, they are not subject to withholding.  I believe the instructions for 1099-R states it as well.

I believe it is because the 402(g) refund is taxable in the year deferred and not necessarily the year received.

From the 1099-R instructions

Excess deferrals. Excess deferrals under section 402(g) can occur in section 401(k) plans, section 403(b) plans, or SARSEPs. If distributed by April 15 of the year following the year of deferral, the excess is taxable to the participant in the year of deferral (other than designated Roth contributions), but the earnings are taxable in the year distributed. Except for a SARSEP, if the distribution occurs after April 15, the excess is taxable in the year of deferral and the year distributed. The earnings are taxable in the year distributed. For a SARSEP, excess deferrals not withdrawn by April 15 are considered regular IRA contributions subject to the IRA contribution limits. Corrective distributions of excess deferrals are not subject to federal income tax withholding or social security and Medicare taxes.

Thanks

I recently came across a copy of ASPPA's CPC Study Guide on google and it says differently.

Corrective Distributions
Several types of corrective distributions exist: excess contribution refunds (ADP), excess
aggregate contribution refunds (ACP), excess deferral refunds (IRC §402(g)) and IRC
§415 excess refunds. Of these corrective distributions, IRC §415 excesses are probably
the least common. These occur when an employer chooses to refund deferrals to allow a
participant to receive the full employer contribution.

All corrective distributions have the following in common:
 Not eligible for rollover;
 Subject to 10 percent federal income tax withholding unless the participant elects
otherwise;
 Not subject to the 10 percent additional tax on early distributions;
 Allocable earnings should be distributed with the excess; and
 Any match attributable to refunded deferrals must be forfeited. However,
matching contributions can be refunded or forfeited based on the vesting
schedule for an ACP correction if the deferrals to which the match is attributable
remain in the plan.

Corrective distributions differ:

 Starting with the 2008 plan year, all are taxable in the year distributed, except
distribution of excess deferrals (i.e., violations of IRC §402(g)), which continue to
be taxable in the prior year and are taxable in both the prior year and the year of
distribution if not timely corrected; and
 Excess deferral refunds for HCEs are included in ADP testing; all other types of
corrective distributions are excluded from nondiscrimination testing.

If you have access to the EOB, the 2017 version on pages 7.302 and 7.303 addresses this question. Generally subject to 10% withholding rules if taxable in the year of distribution.

I think the CPC study guide oversimplifies the issue.  Generally, a nonperiodic distribution is subject to the 10% withholding rule because it is taxed in the year of distribution.  This is not necessarily the case with with a 402(g) corrective distribution. 

The 1099-R instructions clearly state that "Corrective distributions of excess deferrals are not subject to federal income tax withholding or social security and Medicare taxes."  Presumably, this is because the distribution is taxable in the year of the contribution rather than distribution, as long as it is distributed by April 15 of the year following the contribution.  

What if the distribution is AFTER 4/15?  I know the gross is taxed in both years and earnings in the current one.

Still no withholding?

Check out https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-exceeded-code-402g-limits-for-the-calendar-year-and-excesses-were-not-distributed

If the total of a plan participant’s elective deferrals exceeds the limit under IRC Section 402(g), to avoid failing IRC Section 401(a)(30), the excess amount plus allocable earnings must be distributed to the participant by April 15 of the year following the year of deferral. Excess deferrals not timely returned to the participant are subject to additional tax. 

Timely withdrawal of excess contributions by April 15

• Excess deferrals withdrawn by April 15 of the year following the year of deferral are taxable in the calendar year deferred.
• Earnings are taxable in the year they're distributed.
• There is no 10% early distribution tax, no 20% withholding and no spousal consent requirement on amounts timely distributed.

Consequences of a late distribution

• Under IRC Section 401(a)(30), if the excess deferrals aren't withdrawn by April 15, each affected plan of the employer is subject to disqualification and would need to go through EPCRS.
• Under EPCRS, these excess deferrals are still subject to double taxation; that is, they're taxed both in the year contributed to and in the year distributed from the plan.
• For any distributions, attributable to elective deferrals designated as Roth Contributions, all distributions will be reported as taxable in the year distributed. Designated Roth contributions will have already been included in income in the year of deferral.
• These late distributions could also be subject to the 10% early distribution tax, 20% withholding and spousal consent requirements.

Excess deferrals distributed to highly compensated employees are included in the Actual Deferral Percentage (ADP) test in the year the amounts were deferred. Excess deferrals distributed to nonhighly compensated employees aren't included in the ADP test if all deferrals were made with one employer. Excess deferrals distributed after April 15 are included in annual additions for the year deferred.

How to find the mistake:

Ensure that no one's elective deferrals exceed the 402(g) limit for a year by comparing the amount deferred to the 402(g) limit. If anyone exceeds the 402(g) limit and this isn't corrected, the plan could be disqualified.

How to fix the mistake:

IRC Section 72(t) imposes a 10% additional tax for distributions that don't meet an exception, such as death, disability or attainment of age 59 ½, among others. To avoid this additional tax, correct excess deferrals no later than April 15 of the following year. If you don't correct by April 15, you may still correct this mistake under EPCRS; however, it won’t relieve any Section 72(t) tax resulting from the mistake.

Under Revenue Procedure 2016-51, Appendix A, section .04, the permitted correction method is to distribute the excess deferral to the employee and to report the amount as taxable both in the year of deferral and in the year distributed. These amounts are reported on Forms 1099-R. These amounts are reported on Forms 1099-R. In the case of amounts designated as Roth contributions, the excess deferral will already have been reported in income in the year of deferral. However, the amount will be reported as taxable in the year distributed.

I don't see how 20% withholding could apply - maybe this is an error? It isn't an eligible rollover distribution.

Consequences of a late distribution

• Under IRC Section 401(a)(30), if the excess deferrals aren't withdrawn by April 15, each affected plan of the employer is subject to disqualification and would need to go through EPCRS.
• Under EPCRS, these excess deferrals are still subject to double taxation; that is, they're taxed both in the year contributed to and in the year distributed from the plan.
• For any distributions, attributable to elective deferrals designated as Roth Contributions, all distributions will be reported as taxable in the year distributed. Designated Roth contributions will have already been included in income in the year of deferral.
• These late distributions could also be subject to the 10% early distribution tax, 20% withholding and spousal consent requirements.

47 minutes ago, Belgarath said:

These late distributions could also be subject to the 10% early distribution tax, 20% withholding and spousal consent requirements.

"Could" = "Wishy-washy"