Compliance Cue Cards™ – 401(k) Excesses

ACTION

• Excess deferrals and related earnings must be distributed to participants by April 15 of the year following the year of the excess.

IMPACT

• Failure to distribute excess deferrals may result in plan disqualification.

ACTION

• Excess contributions and related earnings must be distributed by the last day of the plan year following the year of the excess.

IMPACT

• Excess contributions corrected within 2 ½ months after the end of the plan year will generally be taxable to the participant in the year of contribution. Note: effective for plan years beginning after 12/31/2007, excess contributions and earnings will be taxable in the year received.
• Excess contributions corrected later than 2 ½ months after the end of the plan year will be taxable to the participant in the year of distribution and the plan sponsor will be subject to a 10% excise tax* on the excess.

ACTION

• Excess aggregate contributions and related earnings must be distributed by the last day of the plan year following the year of the excess

IMPACT

• Excess aggregate contributions corrected within 2½ months after the end of the plan year will generally be taxable to the participant in the year of contribution. Note: effective for plan years beginning after 12/31/2007, excess aggregate contributions and earnings will be taxable in the year received.
• Excess aggregate contributions corrected later than 2½ months after the end of the plan year will be taxable to the participant in the year of distribution and the plan sponsor will be subject to a 10% excise tax* on the excess.

*Effective for plan years beginning after January 1, 2008, plans utilizing the Eligible Automatic Contribution Arrangement have 6 months after the end of the plan year to correct excesses.