Excess amounts and income (gains or losses) thereon are taxable in calendar year in which contributed, until the end of the 2007 plan year.

Excess amounts and income (gains or losses) thereon are taxable in the year distributed, beginning with plan years starting after 12-31-07.

If excess amount is under $100 (excluding earnings), excess plus income (gains or losses) thereon is taxed in year of distribution.

Excess Contributions will be taxable in the year distributed beginning with tests for plan year 2008. Prior to then the following was required.

“First in, first out” (FIFO) applies to the taxation of returns of excess contributions. For a calendar year plan that returns deferrals for the 2005 plan year on February 28, 2006 (or at anytime in 2006 before March 16th, 2006), The excess contribution amount assumed returned is the first amount deferred.

For an off-calendar year plan. The tax result becomes more complex for the participant in an off-calendar year plan. For example, a 2005 plan year ending June 30, 2006. The test is run and the correction is made between July 1 and September 15, 2006. The taxation of excess must be made using FIFO, so the amounts returned will start with the July 1, 2005 deferrals. Since the participant's normal tax filing deadline was April 15, 2006 for the 2005 year, the participant will have to amend his or her 2005 tax return. Even if the taxpayer was an extension and had not yet filed their tax return by the time of the distribution of the excess contributions (so that no amended return has to be filed), the taxpayer will owe interest on the distributed amount from the April 15th due date up to the actual filing of the return.

Note that earnings are calculated using any reasonable basis and need not specifically tie into the FIFO basis.

No 10% penalty on early distribution, no 20% withholding and no spousal consent requirement. No Federal Tax, FICA or FUTA.

Excess aggregate contributions will be taxable in the year distributed.

Excess aggregate contributions may be either employer matching contributions or employee after-tax. Which dollars are returned depends on the contribution type.

Returns of employee after-tax contributions follow the same rules discussed above for pre-tax employee deferrals.

However, the FIFO method does not apply to the refund of excess aggregate contributions, which are employer matching contributions. Instead, the taxable year for including the excess aggregate amount is the taxable year ending with or within the plan year during which the excess aggregate contributions occurred.

Thus, in a calendar year plan, the excess aggregate amount is taxed in the prior calendar year, the test year during which the excess arose.

If distributing both after-tax employee and employer matching contributions, employee after-tax contributions are distributed first. Thus, employer dollars are distributed only after all employee after-tax contributions are returned.

No 10% penalty on early distribution, no 20% withholding and no spousal consent requirement. No Federal Tax, FICA or FUTA.

Reported on 1099R. Allocable earnings, including GAP period income , are taxed in the same year as the excess contribution or excess aggregate contribution are taxed.

NOTE: The Pension Protection Act has eliminated gap period income from all plans (not just automatic enrollment plans) for failed ADP and ACP tests effective for plan years beginning after 12-31-07.

Use Code 8 as the deferrals are taxable in the current year

Old Rules

Use Code P for prior tax year for a calendar year plan returning deferrals before March 16.

Use Code D if the deferrals are taxable in a second prior tax year. This may occur in off calendar year plans with plan years that end in October or November where the 2½ month period would extend into the next year and the FIFO amount to be returned would relate to two years earlier. For example, in a plan whose plan year ends October 31, 2006 and the refund is made January 10, 2007, then the FIFO amount would begin with deferrals made in November 2005.

If corrected within 2½months, plan administrator must notify the participant that (1) the distributed amount is includible as income for the prior year and (2) this may require the filing of amended tax return.

Returned excess contributions and excess aggregate contributions are included:
> in the Top Heavy calculation (a five-year lookback applies to an in-service distribution), and
> 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.