Plans without an Eligible Automatic Contribution Arrangement:
Return excess and income thereon within 2½ months following close of plan year to avoid the 10% employer penalty.

Plans with Eligible Automatic Contribution Arrangement(EACA)
Plans with an EACA(s) will have 6 months following the close of the plan year to test and return a refund without an employer 10% penalty, beginning with plan years starting after January 31, 2007.

Final automatic contribution regulations bring new EACA rules:
EACA 6-month correction deadline applies only if all eligible NHCEs/HCEs are covered under the EACA for the entire plan year (or the portion of the plan year that the participant is eligible). Otherwise, the 2½ month refund rule is to be used. Effective for plan years beginning on or after January 1, 2010.

Example: An EACA that covers only newly eligible participants and does not cover existing participants will be required to refund within 2½ months.

For plan years beginning on or after January 1, 2008, excess amounts and income (gains or losses) thereon are taxable in the year distributed.

AS of plan year 2008, excess contributions are taxable in the year distributed.

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

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 are taxed in the same year as the excess contribution or excess aggregate contribution are taxed.

Use Code 8 as the excess contribution is taxable in the current year.

Returned excess contributions and excess aggregate contributions are included:
> in the Top Heavy calculation (five-year lookback applies to this as 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.

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 timely made QNEC will avoid the 10% employer penalty.

Note that because of the 12-month rule, QNEC contributions may not be made for plans using the prior year testing method.