Using Negative Contributions to Correct Excess Deferrals

I feel like I must be overlooking a prior discussion around this topic but was not able to locate one in my search.

Plan has highly comped individual that switched jobs earlier this year. He made significant  401(k) elective deferrals at last job before coming to new job.  He enrolled in new plan and has been deferring to new plan for several months now.  Last week, he realized he is well over the elective deferral limit for 2018 and is seeking correction from the plan.  Since this has been discovered in 2018, the record keeper is proposing to correct through negative contributions within the next payroll runs.   Sounds like that is fairly routine (been awhile since I've had one discovered in the same year as the deferral) but am curious as to what sort of paperwork / documentation all this generates.  Also, still trying to get our arms around potential earnings in the account but assume if he has earnings on the excess that will have to come out too?  How does that happen with negative contributions?

I would just do a 402(g) excess distribution from the account.  Normal earnings calc would apply (sometimes the carrier will do it, sometimes the TPA calculates it).  He gets all the money back (withholding is optional).  It will generate a 2018 tax form, so he'll pay taxes on it.  And you don't mess with payroll.

36 minutes ago, BG5150 said:

I would just do a 402(g) excess distribution from the account.  Normal earnings calc would apply (sometimes the carrier will do it, sometimes the TPA calculates it).  He gets all the money back (withholding is optional).  It will generate a 2018 tax form, so he'll pay taxes on it.  And you don't mess with payroll.

This.

Im surprised to hear the RK proposing to fix it with negative contributions, they usually resist creative accounting fixes, for good reason...

Thanks.  I was surprised too.  They say this way the W-2 will be correct, etc. and won't have to worry with additional reporting.  Huh?  These guys are a LARGE rk and made me feel like I'd missed the boat to be questioning any of this.

The 402g excess would be easier.  Plus the r/k gets the distribution fee!

I think if you quickly catch the error on payroll by going over in 1 plan a negative contribution on the next payroll to fix would "probably" fly. I know we've done it on occasion, not sure if it would hold up to a detailed audit or not.

That said, two plans just follow the procedures for doing a 402(g) excess refund which are probably spelled out in the Plan and likely include the participant requesting it.

Thanks.  So here the participant requested the correction be made in the second plan (is leaving account in the former employer's plan as-is).  While this was caught relatively quickly in that it was caught in the same plan year, there are still 2 to 2 1/2 months of excess deferrals in the account (really almost all of the account is over) so it's not like they just messed up on the last payroll run and are adjusting, etc.

Correcting through negative payroll, without voiding erroneous pay could cause other compliance issues for the sponsor since there was a deferral agreement to support the deferrals made.  The participant needs to suspend contributions or provide the sponsor with the YTD deferrals from the other employer if the payroll system allows a YTD deferral override.  Many times, it is easier for the employee to suspend until 2019.

Provided all deferral proof is provided to allow the plan to distribute excess deferrals, plus earnings, it is also probably best to have the amount distributed by 12/31/2018 so the deferral & earnings are taxable in 2018.  Otherwise, if distributed after 2018, the deferral is taxable in 2018, but the earnings are taxable in 2019 (assuming earnings in this volatile market).

Because hired in the current year, the participant wouldn't be a HCE until the following year (given the look-back year) unless a 5% owner.  Also, my understanding of the 401(a)(30) regulations is that the excess deferral amount is still tested in ADP for non-highly compensated employees as it's not an excess deferral with the same employer (i.e., 402(g)).