Excess Annual Addition - Returning After-Tax Contributions

 Impact on Participant / Employer

Amount distributed is not subject to 10% penalty on early distribution, restrictions on early withdrawal or spousal consent.

Earnings are subject to voluntary income tax withholding under 3405. Not eligible rollover distribution. Not considered for Required Minimum Distribution.

 If Not Timely Corrected

File under VCP or self-correct under SCP.

 Elective Deferrals may be distributed to the individual.  Other contributions are placed in a suspense account to be used as an employer contribution in the succeeding year.

Tax Reporting / Notice

1099R to report distribution.  Box 7 on 1099R should show Code E.

 Other Tests

Amount returned to correct excess annual addition is not considered in ADP/ACP testing.

 This may impact already completed tests.

Excess Annual Addition - Returning Elective Deferrals

2. Returning elective deferrals, plus earnings thereon (only if plan provides for return of earnings on elective deferrals.  For limitation years beginning after December 31, 1995, if the plan does not provide for distribution of such earnings, they will be considered as an employer contribution for the limitation year in which deferral was contributed.)

Note: If return elective deferrals to NHCE, do not have to forfeit/return corresponding match.  However, can only return unmatched elective deferrals to HCE without a nondiscrimination rule violation.  If match associated with deferral:  (1) hold excess deferral and match in a suspense account; or (2) reallocate match only (as specified in plan document).

Impact on Participant / Employer

Amount distributed not subject to 10% penalty on early distribution, restrictions on early withdrawal or spousal consent.

Subject to voluntary income tax withholding under 3405. Not eligible rollover distribution. Not considered for Required Minimum Distribution.

If Not Timely Corrected

File under VCP or self-correct under SCP.

1099R to report distribution.  Elective deferrals and/or after-tax contributions reported on separate 1099R.  Box 7 on 1099R should show Code E.

Amount returned to correct excess annual addition is not considered in ADP/ACP testing or when determining the maximum elective deferral for the calendar year.

Excess Annual Addition - Holding Employer Contributions and/or Forfeitures

 Correction

3.  Holding employer contributions and/or forfeitures in a suspense account and allocating them to the affected participant (or, if that participant is no longer employed by the employer, to all participants) in the next limitation year.

Taxable Year

N/A

Impact on Participant / Employer

The employer must pay 10% excise tax on nondeductible contributions if the excess annual addition is placed in a suspense account until the next limitation year.

 These contributions will count toward the annual additions limit of the affected participant (or of the other participants it is reallocated to, if the participant is no longer there) in the next limitation year.

If Not Timely Corrected

File under VCP or self-correct under SCP.

Tax Reporting / Notice

N/A

Other Tests

N/A

Excess Annual Addition - Reallocating the Excess Annual Addition

 Correction

4.  Reallocating the excess annual addition in the same limitation year in which excess was created to participants not affected by 415 limit.

Taxable Year

N/A

Impact on Participant / Employer

The excess will count toward the affected participant’s 415 limit, and when reduced for that participant will also count towards the 415 limit of the other participants to whom it is reallocated in the current limitation year.

If Not Timely Corrected

File under regular VCP.

Tax Reporting / Notice

N/A

Other Tests

N/A