Excess deferral

Excess Deferral

Contributions to an IRA, 401(k), or other tax-deferred account over and above the limits on what may be deferred. Most plans place limits on how much can be contributed to the account each year and written off of one's taxable income. If one contributes too much, one runs the risk of paying taxes on the excess deferral in the year it is contributed as well as the year it is distributed after retirement. One may avoid this if one requests a refund of the excess deferral in the same tax year. If one does this, one only owes taxes for the current year.

Excess deferral.

An excess deferral is a contribution that exceeds the tax-deductible amount you can add to an employer sponsored retirement plan in a particular year.

Your plan may allow excess deferrals to be distributed to you. If so, you must make the request by April 15 of the following year. If the amount and any earnings are returned to you by that date, the excess is taxed in the year it went into the plan and the earnings are taxed in the year they are distributed. There's no 10% tax penalty for early withdrawal.

For example, if you contribute too much in 2008, you must request distribution by April 15, 2009. If the distribution is made by April 15, 2009, you report the excess as income for 2008 and the earnings as income for 2009.

If the distribution is not made before the deadline, the excess is taxed in the year it was made and also when it is distributed.

Mentioned in ?
References in periodicals archive ?
Excess deferrals by a noninsider are also permitted to be corrected through a distribution of the excess deferral by the end of the year immediately following the year in which the failure occurred.
Under prior law, 401(k) plans satisfied the discrimination tests by returning excess deferral contributions to the HCEs who had the highest deferral percentages, as opposed to the HCE with the highest deferral amount.
But if the excess deferrals are not distributed by that deadline, the proposed regulations would provide that any distribution attributable to an excess deferral that is a designated Roth contribution is includible in income and not eligible for rollover.
The proposed regulations had no corrective mechanism for nongovernment plans, but the final version allows nongovernment plans to self-correct by distributing the excess deferrals by the first April 15th following the year of excess deferral.
Effective for plan years beginning in 1997, the Act provides that the distribution of excess deferrals is required to be made on the basis of the amount of contributions made by each HCE.
Excess deferrals do not cause plan disqualification when they are made to plans of two or more unrelated employers if they are corrected.
Effective for excess deferrals attributable to tax years beginning on or after January 1, 2007, gap earnings must be included when excess deferrals are distributed under Sec.
The agent is urged to check for excess deferrals by requesting annual contribution records and/or salary reduction agreements.
401(k) and (m) rules(22) permitting nondiscrimination testing based on nonhighly compensated employees' (non-HCEs) actual deferral percentages (ADP) and (2) returning excess deferrals to highly compensated employees (HCEs).
A plan that would otherwise fail to meet the test is not treated as failing if the test is corrected by (1) additional employer contributions, (2) refunds of excess deferrals or (3) recharacterization of deferrals as employee after-tax contributions.
Excess deferrals that cause the plan to lose its Sec.
No matching or QNECs: No matching contributions are allowed to a SARSEP, and excess deferrals cannot be corrected with qualified nonelective contributions (QNECs).