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.
In effect, an excess deferral
left in the plan is taxed twice-once when contributed and again when distributed.
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
When, in later years, he attempts to use the 15-year catch-up election, he makes excess deferrals
, as, unbeknownst to him-and often to the recordkeeper/adviser/plan sponsor as well-the 15-year election has already been exhausted.
Distributions of excess deferrals
are not included in this definition.
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.
do not cause plan disqualification when they are made to plans of two or more unrelated employers if they are corrected.
Furthermore, a 401(k) plan is subject to the actual deferral percentage test that limits the difference between contributions made by HCEs as a group and those made by non-HCEs as a group, often with the result that participants who are HCEs must receive back their excess deferrals
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.
Employers may use any reasonable method for allocating income to excess deferrals
, excess contributions or excess aggregate contributions.