Excess Deferrals After April 15
Rev. 4/3/09, E-mail Alert 2009-05

If an excess deferral is refunded after the April 15th deadline, how does the "double taxation" occur and what is reported to the IRS?

The "double taxation" occurs since the 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))

For 2008, there is an excess deferral of $1,600 with a loss of $540 for a net of $1,060; how is this reported?

The participant reports the excess deferral as 2008 income. However, there is no need to issue a Form 1099R for 2008 as the total deferred is reported on the W-2 for 2008. And, any amount above the 402(g) limit is not deductible on the participant's Form 1040.

To continue our example, in 2009, the excess deferral, net of the loss, i.e. $1,060, is distributed on May 5, 2009. A 2009 Form 1099R is issued for $1,060 for the 2009 tax 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. (Taxation in the year earned and in the year distributed.)

IRS 2008 Form 1099R Instructions 
Information below is from Page 5 of the 1099R Instructions
"Excess deferrals. Excess deferrals under section 402(g) can occur in 401(k) plans or 403(b) plans or SARSEPs. If distributed by April 15 of the year following the year of deferral, the excess is taxable to the participant in the year of deferral, but the earnings are taxable in the year distributed. Except for a SARSEP, if the distribution occurs after April 15, the excess is taxable in the year of deferral and the year distributed. The earnings are taxable in the year distributed. For a SARSEP, excess deferrals not withdrawn by April 15 are considered regular IRA contributions subject to the IRA contribution limits. Corrective distributions of excess deferrals are not subject to Federal income tax withholding or social security and Medicare taxes. For losses on excess deferrals, see Losses below. See the regulations under section 457 for special rules for excess deferrals under governmental 457(b) plans.

Losses. If a corrective distribution of an excess deferral is made in a year after the year of deferral and a net loss has been allocated to the excess deferral, report the corrective distribution amount in boxes 1 and 2a of Form 1099-R for the year of the distribution with the appropriate distribution code in box 7. If the excess deferrals consist of designated Roth account contributions, report the corrective distribution amount in box 1, 0 (zero) in box 2a. However, taxpayers must include the total amount of the excess deferral (unadjusted for loss) in income in the year of deferral, and they may report a loss on the tax return for the year the corrective distribution is made."

Bill Grossman, ERPA, QPA