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
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.
In effect, an excess deferral
left in the plan is taxed twice-once when contributed and again when distributed.
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.
* The plan will not be disqualified solely because of the existence of excess deferrals
. * Deductions for elective contributions will not be disallowed.
These include corrective distributions of excess deferrals
, excess contributions and excess aggregate contributions, as well as deemed distributions on the default of a participant loan and for the costs of life insurance coverage (P.S.
In general, no other distribution may be reported with this distribution (including excess deferrals
, excess contributions or excess aggregate contributions).
* No matching or QNECs: No matching contributions are allowed to a SARSEP, and excess deferrals
cannot be corrected with qualified nonelective contributions (QNECs).
Benefits that otherwise would be lost to the HCEs could be restored; the employer could safely comply with the nondiscrimination rules without worrying about potential violations or complications associated with correcting excess deferrals
and contributions to a plan.
 Excess deferrals
that do not cause a loss of Sec.
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.