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.

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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.
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.
Excess deferrals 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 (i.
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.