“However one of our employees just reported to us that he had also made deferrals to a prior employer’s plan, and, unbeknownst to us, his deferrals to our plan caused him to exceed his 402(g) limit in 2013 when deferrals to the two plans are combined. He now wishes to request a return of the excess deferral from our plan instead of the plan of his prior employer. Must we honor that request?”
Michael A. Webb, vice president, Retirement Practice, Cammack LaRhette Consulting, answers:
A good rule of thumb for answering many compliance-related questions if to find out what the plan document says, and this question is no exception! Plan documents often contain language in the excess deferral section of the plan that describes the precise procedure for addressing excess deferrals due to deferrals made from a plan of an unrelated employer. Often, the plan will permit such a return of excess, provided that the participant notifies the employer by a certain date (typically March 1) about the excess deferral as well as the precise amount of the excess from the prior year. However, per Treasury Regulation 1.402(g)-1(e)(4), the plan is not required to permit the return of such an excess, so your plan’s language can prohibit such a return of excess, or, if the plan language is silent on the issue, you can deny the participant’s request.
However, as a practical matter, this will often create a dilemma for the participant, since the participant will now need to request a return of excess from the plan of the prior employer, who may also deny the request if there is no language permitting such a return of excess. In addition, participants often receive a lump-sum distribution of assets immediately upon leaving their previous employer, which will often make a return of excess from that plan impossible. The withdrawal often cannot be reclassified as a return of the excess deferral, since it is typically made before the excess deferral occurred. Treasury Regulation 1.402(g)-1(e)(3) expressly prohibits the reclassification of an ordinary distribution as a return of excess if the excess occurred after the date of distribution, which is almost always the case.
If the employee is unable to obtain a timely return of excess from either plan, it is important to note that this is NOT an operational failure that could affect the qualified status of either plan. Such a failure would only occur if a participant contributed in excess of the 402(g) limit ($17,500 in 2014, $23,000 if age 50 or older) in a SINGLE plan. According to Treasury Regulation 1.402(g)-1(e)(8)(iii), the only significant consequence in the case of a failure to return an excess attributable to plans of multiple employers is double taxation to the participant, both in the year of the excess and the year that the participant ultimately receives a distribution from either plan.
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NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.