If an excess deferral is refunded after the April 15th deadline, how does the "double taxation" occur and what is reported to the IRS?
Rev. 4-15-03, E-mail Alert 2003-7

The "double taxation" occurs since participant who exceeds the 402(g) limit (including catch-up, if eligible) must pay tax on the excess deferral in the year it is originally deferred; and then, in the year in which the excess deferral is ultimately distributed. (See Tax Code Regulations 1.402(g)-1(e)(8)(iii))

Using the illustration from the E-mail Alert FAQ of a 2002 excess deferral of $1,200 with a loss of $240 for a net of $960; how is this reported?

- The participant reports the excess deferral as 2002 income. However, there is no need to issue a 1099R for 2002 as the amount belongs on the W-2 for 2002. Again, any amount above the limit is not deductible.


- In 2003, the excess deferral, net of the loss i.e. $960, is distributed after April 15th for example on June 20, 2003. A 1099R is issued for $960 for the 2003 tax year with a code 8 representing an excess contribution for the current year.


- Note: If there had been an investment gain, rather than a loss, the 1099R would be for the total excess deferral plus the earnings. This would all be reported as a code 8 and the result would be full double taxation.

The 2002 Tax Year 1099R Instructions state on page R-3, Corrective Distribution Section under the paragraph starting "Elective deferrals." : "Except for a SARSEP, if the distribution occurs after April 15, the excess is taxable in the year of deferral and the year distributed."