Roth 401(k) excess deferral
If I have an excess deferral kicked back due to highly compensated employees putting away more than the rank and file employees, what happens to taxes for those HCEs? Do they re-file 2009 taxes with new income numbers? What happens as far as taxes for HCEs that excess kicked back that was a combination Roth 401k and traditional 401k contributions?
What happens to those that contributed 100% to the Roth 401(k) option and had the excess?
Thanks to anyone that can help.
Permalink Submitted by Alan Spross on Mon, 2010-08-16 22:14
These are technically excess contributions, not excess deferrals. They are taxable to the employee in the year DISTRIBUTED including allocated income to the end of the plan year. Therefore, there is no need to amend 2009 returns. Designated Roth contributions are post tax so there would be no additional income to be reported on them except for earnings. The following is a summary of how plan provisions may be designed with respect to assignment of the excess contribution to the pre tax vrs the Roth options.
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ADP/ACP Correction Methods
If a highly compensated employee (HCE) has made both Roth and pretax contributions in the same plan year and the plan fails ADP testing, the regulations permit the HCE to elect whether refunds of excess contributions are treated as pretax, Roth, or a combination of the two. Alternatively, the employer or document provider may design the plan by choosing one of the correction methods instead of allowing the participant to choose. Although the distribution of excess Roth contributions is not taxable, the income allocable to a corrective distribution of the Roth excess contribution is taxable. Similar rules exist for the ACP test. The plan document must reflect the extent to which a plan permits employees to determine the “character” of excess and excess aggregate contributions. Once the IRS “sample” amendment and tax recovery rules are issued, it will be clearer how to best address this issue.
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Permalink Submitted by mk foss on Mon, 2010-08-16 23:04
I can’t believe that I’m disagreeing with Alan but I think this is only a clarification.
A HCE who makes pretax excess deferrals is taxed on them in the year deferred. So if in March 2010 a person is informed that the HCE testing indicates they’re getting money back for 2009deferrals, they pay tax on the excess deferral as salary income in 2009 (This assumes that the excess plus earnings was distributed by April 15, 2010). In 2010 they receive the funds back plus earnings and only the earnings are taxed in 2010. They receive a 2010 Form 1099R coded “P” which indicates that it was taxable in the prior year for the deferral. No Form 1099R is issued for the year of the excess deferral.
An excess contribution can occur if they participant has changed employers and between the two plans has contributed/deferred more than the $16,500/$22,000 allowable maximum. In that case, the excess is also taxed in the year contributed/deferred and the earnings in the year withdrawn. One caveat – if the excess is not withdrawn by April 15 of the year after the deferral, it cannot be withdrawn until there is a triggering event, like a retirement, rollover, etc. The amount that tax was paid on would be basis at that juncture.
The Roth deferrals is another animal and I’ll rely on Alan for that.