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Handling an Excess Deferral

Q. If we or the employer find out that an employee was not eligible for the 15 year catch-up last year, do we just distribute it as 1099 2014 income? It is not considered an excess deferral under Code Section 402(g) is it? If it is, the April 1 deadline was missed and now it becomes double taxed. I hope not!

A. Unfortunately, it is an excess deferral not timely corrected, and, thus, subject to double taxation, which occurs whether or not the employee was eligible for a distribution. If not widespread, double taxation should be eligible for self-correction as an operational failure. 

In the situation described, the provider should report the excess as taxable for the year in which it occurred, and retain it in the account so that it is once more subject to taxation when finally distributed.

08/19/2014

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