Excess deferral

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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.

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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.
Excess deferrals 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.
Excess deferrals: 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: 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.