Excess 401(k) Contribution

It looks like there is still time for the taxpayer to fix this.

"Unless timely distributed, excess deferrals are (1) included in a participant?s taxable income for the year contributed, and (2) taxed a second time when the deferrals are ultimately distributed from the plan. See IRC Sections 402(g)(1) and 402(g)(2) and Reg. Section 1.402 (g)-1(e)(2). A participant who fails to receive a distribution of the excess deferrals does not receive basis in his pre-tax deferral account equal to the amount of excess deferrals. See IRC Section 402 (g)(6).

"The amount of the excess deferral will not be taxed twice if a corrective distribution is made. See IRC Section 402(g)(2). The corrective distribution must include the amount of the excess deferrals, along with amounts earned on the excess deferrals during the calendar year during which the deferrals are made without regard to income earned during the ?gap period? between the close of calendar year in which the excess contribution was made and the time of actual corrective distribution. See IRC Section 402(g)(2)(A)(ii). Additionally, the corrective distribution must be made be made no later than April 15th following the close of the calendar year during which the excess deferral was made. See IRC Section 402(g)(2)(A)(ii). For example, excess deferrals made during 2016 must be distributed by April 15, 2017. This April 15th deadline is not postponed by extending the filing of the employee's federal income tax return."

Yes, but the problem is that he doesn't want to fix it. He wants to keep the excess contributions made by his employers, and thinks that he will reap more than he will lose in penalties and additional taxes.

Looks like the individual gets to keep the dough!

"Not later than the first April 15 following the close of the taxable year, the plan may distribute ****to the individual**** the amount designated under paragraph (e)(2)(i) of this section (and any income allocable to that amount)" emphasis added

For any excess contribution that the employee makes and then withdraws by Apr 15, don't the 401(k) plan administrators also return the contribution's match to the employer?

A bit at:

Exactly. That's the point. The guy wants to keep the employer contributions, so he's willing to pay a penalty and extra tax to do that because he thinks he'll still come out ahead.

Is that the case? In one statute it says there's a 10% penalty on the employer - I hope I'm reading that one wrong. But I just haven't been able to figure out what the best advice for him is.

As a layperson, I would be googling on the duties of a 401(k) plan administrator. I see that federals statute (ERISA) requires 401(k) plans to have such an administrator. A taste of what the law requires of administrators:

For one, that the 401(k) plan administrator has a fiduciary duty to the company seems clear. If I had to bet, I would bet that the statute (or related CFRs?) one way or another requires a 401(k) plan to return the company match in a situation like this.

If I magically got my law degree and passed the bar; if this guy were my client; and for this guy's protection, I would suggest (insist?) the guy call the plan administrator and ask whether the match gets returned to the company.

This site talks some about plan administrators correcting "an incorrect employer matching contribution" (or else face the music with the IRS?):

I don't see how either employer could be penalized - they did nothing wrong. They were not aware of what the other was doing.

If this were me, I would go to the one plan administrator who I would think most likely to be helpful to me (maybe no way of telling) and request $x be returned to me no later than April 15 in accordance with

If there is more to it than this, the plan administrator has the burden, and quite possibly will not investigate and just follow these instructions.

The alternative, it seems, is for the individual to pay t axes now on the overcontribution and have zero basis in the overcontribution in the

Oh what a tangled web we weave . . .

According to Taxed and Spent snipped-for-privacy@nonospam.com:

The IRS says " a plan that does not distribute excess deferrals risks plan disqualification. " While it seems unlikely for a one-off excess, if I were a plan adminstrator why would I take the chance?

I have read all the replies posted through this morning. My comments are:

1. There is no 6% additional tax for an excess contribution to a 401(k). If you think there is then you need to provide a citation as I can not find it in the Regs or the instructions for Form 5329.
2. The penalty for not making a corrective distribution prior to the due date of the tax return is double taxation.

1. The excess contribution will be taxed a second time when distributions from the the 401K commence.

I concur, but still suggest the individual try to get one employer to make a distribution to the individual of the excess.

Please remember that Stuart B stated that the taxpayer believes his ROI will exceed the additional tax and double taxation. Well, there is no additional tax, just the double taxation. It is possible that the taxpayer's ROI might be a better return even though the $5000 will be taxed twice. If that extra $5K also triggered an employer match, then it is quite possible.

It is like rolling the dice: will the employer return the excess to the individual, including the matching contribution? If so, I don't see how his ROI could be better with double taxation. Of course, if the employer decides to keep the matching contribution, that changes things. But the section I cited said the excess is to be distributed to the individual.

Place your bets . . .

If the above CFR section said, "... the plan ****shall**** distribute to the individual... ", then I might agree with you.

But it does not.

I think the plan's documents determine whether the croo... uh, employee here gets to keep the matching contribution.

Furthermore, from reading (e)(2)(i), it appears to me that the CFR quoted above is referring specifically to "elective deferrals." The latter are those amounts of the employee's salary that the employee elected to put into a 401(k), deferring taxation of these amount. The company match is not a part of any "elective deferral."

Excellent point.

There are two employers and two employer plans. The $5000 excess has most probably been caused by the sum of the contributions to two plans exceeding the taxpayer's allowable annual amount. Neither employer would show an excess contribution. There would not be any return of an employer match as there is no return of any excess contribution.

Yes, but I was assuming the individual could contact one plan and advise them of the excess contribution due to two jobs.

Having considered all the comments on this thread, I believe the taxpayer knew what he was doing. I bet the excess contribution is likely mostly due to the employer's matching contribution, which is free money. Double taxation on free money still nets free money, especially if the second tax hit is after years of earnings.

Yes, taxpayer did it on purpose because he wanted the extra employer contributions. If he withdraws his excess contributions he will have to inform the employers, so they will know to withdraw theirs as well. If he doesn't withdraw, there's double tax on the excess amounts.

But I am exploring whether or not that is the only penalty. I'm not certain that it is. But if it is, taxpayer found a loophole not anticipated by the law or regulations.