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.
Failure to limit amounts in the plan under Code section 402(g) for a calendar year and failure to make the required distribution of those deferrals (excess deferrals
) that exceeded this limit back to the affected participants;
Plans If employee deferrals do not sufficiently satisfy the required actual deferral percentage (ADP) or actual contribution percentage (ACP) tests, it might force the return of excess deferrals
; this, in turn, could result in taxable income to business owners or highly compensated employees.
Relief for operational failures involving excess deferrals
corrected in the tax year following the year of the failure has been changed to include failure to pay amounts during the year in which the original payment date occurred.
(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.
Distributions of excess deferrals
are incomplete, not timely or improperly calculated.
: Deferrals in excess of the amount provided for under the plan or election must be distributed by the end of the service provider's current tax year, with an adjustment made to the amount to which the service provider has a legally binding right at the end of the year (e.g., a reduction in its account balance).
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
(i.e., the amount that does not satisfy the average deferral percentage test requirements) on a fully taxable basis during the first quarter of the following year.
: Excess deferrals
are deferrals in excess of the amount provided for under the plan or election.
Employers may use any reasonable method for allocating income to excess deferrals
, excess contributions or excess aggregate contributions.