OK, maybe we're on to something. Could you explain what is the difference between a 401K pre-tax contribution vs. a 401K deferral contribution? I thought they were the same thing. And I also understand that the steps that Vanguard has taken are required in order to avoid disqualification of the plan.As I mentioned, you have excess contributions not excess deferrals. So why are you quoting the IRS tax treatment of excess deferrals? I think Vanguard is wrong. Your excess contributions should be taxable only in the year distributed, as stated in the specific Code Section I provided above.This is what I believe happened to us. I have read that the ADP testing is dependent on the proportion of non-HCE employees that participate in the plan. If not enough contribute to the 401K plan then the HCE contributions become more limited. However there is no way to determine this test until after the year end. We have been dependent on the Administrator to promptly return any excess contributions before April of the following year. But Vanguard did not do that. The complication is that Vanguard would have had to make this distribution before April of 2023, not in May of 2024! I have been hearing a lot about Vanguard's problems with maintaining their data. Also recently they have decided to shed all of their small 401K plans. I had thought we were fortunate that our 401K are associated with a large company, however I do blame this late distribution on Vanguard's apparently degrading systems. BTW this is the first time we have ever had an excess contribution distribution--timely or not, and I'm not entirely confident that Vanguard hasn't made some other mistake that would not have required the distribution. Nevertheless we suffer the consequences.
"Excess contributions" are different. They happen when a Highly Compensated Employee (HCE) defers more than is allowed based on certain ADP testing done after the year-end. Excess contributions (and associated earnings) returned to the HCE are taxable only in the year distributed. (Sec 4979(f)(2)
On IRS.gov I see 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).]
Also the letter from Vanguard specifically states that the taxable portion of the distribution must be included in 2022 gross income. I am just trying to figure out if we should go ahead and file a 2022 amended return now based on the entire distribution check being taxable--otherwise if we wait until the 1099-R comes in January there will be an additional 8-9 months of interest due.
On a side note, since the excess was not distributed during the 12 months after the end of the deferral year, the plan could be subject to plan disqualification unless specific remedial steps are taken. But that is a separate issue.
Statistics: Posted by brockmari — Tue May 21, 2024 11:12 pm — Replies 5 — Views 414