Excess Contribution After 2½ Months
But Prior to 12 Months After Plan Year Being Tested
[Fail ADP] & Excess Aggregate Contribution [Fail ACP] Continued |
Correction
|
Return excess plus income thereon after 2½ months but prior to 12 months after the end of the plan year. |
Taxable Year |
Excess amount plus income (gains or losses) thereon are taxable in year distributed.
|
Impact on Participant / Employer |
Distributions are subject to voluntary income tax withholding under §3405, but not subject to participant 10% penalty on early distributions or spousal consent.
Employer subject to 10% penalty on excess contributions that are refunded more than 2 1/2 months after the end of the plan year. |
Tax Reporting / Notice |
Reported on Form 1099-R.
Written notice must be given to the employer by the plan administrator within 30 days of the distribution since the employer must pay a 10% excise tax on the excess amount (but not on the earnings). |
Other Tests |
Returned excess contributions and excess aggregate contributions are considered for Top Heavy calculation and are included in the annual additions calculation.
The plan may offset the excess contributions to be distributed by any excess deferrals that have already been distributed to the participant.
|
Other Resources |
IRS Instructions to 1099-R, pages R-4 and R-5 address these transactions in detail including losses. |
Note |
Instead of a corrective distribution, a QNEC may be made at any time up until 12 months after the close of the plan year being tested. A QNEC done up until the 12 months after the end of the plan year being tested does not incur the 10% employer penalty. |
To learn more, call 973-492-1880 or e-mail info@mhco.com.
© 2012, McKay Hochman Co., Inc. All rights reserved.
