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URL:  https://boards.fool.com/mjolah-you-wrote-so-what-part-of-the-34208780.aspx

Subject:  Re: Traditional & Roth Max Contributions Q Date:  5/15/2019  2:45 AM
Author:  joelcorley Number:  26248 of 26270

mjolah,

You wrote, So what part of the "law" are you referring to? The STATUTORY law PROHIBITS exceeding the 402(g) limit. PLAIN READING - NOT ALLOWED. The IRS "regulations" indicate ways to fix it, if a violation exists. The regulations are but "guidelines" but the STATUTE is the "LAW." When in doubt, follow the LAW. …

All right. You asked. Quoting IRC 402(g)(2), copy and pasted from https://www.law.cornell.edu/uscode/text/26/402 :

(2) Distribution of excess deferrals
(A) In general If any amount (hereinafter in this paragraph referred to as “excess deferrals”) is included in the gross income of an individual under paragraph (1) (or would be included but for the last sentence thereof) for any taxable year—
(i) not later than the 1st March 1 following the close of the taxable year, the individual may allocate the amount of such excess deferrals among the plans under which the deferrals were made and may notify each such plan of the portion allocated to it, and
(ii) not later than the 1st April 15 following the close of the taxable year, each such plan may distribute to the individual the amount allocated to it under clause (i) (and any income allocable to such amount through the end of such taxable year).
The distribution described in clause (ii) may be made notwithstanding any other provision of law.


The word may is considered permissive in US law. See page 25 of the "Federal Plain Language Guidelines": https://www.plainlanguage.gov/media/FederalPLGuidelines.pdf

So this section gives the individual the option to report the excess, but not the requirement. It also does not require the employer to distribute the excess. In fact I've seen wording on the IRS website say that a plan does not have to permit excess contribution distributions at all, though I'm not going to go searching for that since you said the statute was sufficient.

Also notice that requests must be made to a plan no later than March 1st - not April 15th.

Also quoting IRC 401(a)(30) copy and pasted from https://www.law.cornell.edu/uscode/text/26/401 :

(30)Limitations on elective deferrals.—
In the case of a trust which is part of a plan under which elective deferrals (within the meaning of section 402(g)(3)) may be made with respect to any individual during a calendar year, such trust shall not constitute a qualified trust under this subsection unless the plan provides that the amount of such deferrals under such plan and all other plans, contracts, or arrangements of an employer maintaining such plan may not exceed the amount of the limitation in effect under section 402(g)(1)(A) for taxable years beginning in such calendar year.


These are the sections of the law that the IRS website repeatedly cites when talking about disqualifying plans for failing to limit elective contributions. Notice that the language in the statute only requires the employer to restrict contributions associated with plans they control?

There is simply no statutory requirement for a plan to prevent or return excess contributions made to another employer's plan - only permissive language that allows for corrective distributions as a potential fix for the individual so they can avoid the "double taxation" penalty for exceeding the elective contribution limit. And as far as I can tell you are making that other stuff up just to scare people.

Saying I'm lying or gaming the system without knowing the facts or knowing the law or knowing me makes me wonder what kind of practice you have. Given how you've treated me here, I certainly don't think I'd want you as either an employer or vendor.

And if I'm wrong here … I still say it's an honest mistake. But I don't think I'm wrong. I think you are. Now try again and tell my why I'm wrong, a fraud and a cheat.

BTW, for everyone else … I've never done what I'm suggesting here. I've always limited my contributions whenever I changed employers. The main reason I did that was out of an uninformed fear of the consequences - not that I could have profited from it anyway. Indeed, that's probably the normal case. All I'm saying here is that dismissing the idea out of hand without analyzing all possible scenarios is silly and you are potentially missing out on an opportunity. So find facts that make it not cost effective before dismissing the idea and don't automatically assume keeping the excess contribution in the account is always the wrong thing to do.

Also you should know that I'm not a financial planner, nor am I involved in the retirement benefits industry. I'm also not a lawyer. I'm a computer programmer currently employed by Microsoft. The company has an internal email discussion list where we talk about investing, company benefits and taxes. This very topic came up a year or two and initially I argued against this tactic I mentioned in this thread. But the person proposing it shot down all my arguments with facts. We also know from experience that management (right up to Satya Nadella) will from time to time intervene in open DL discussions and we have no reason to believe this DL is not also being monitored.

In fact Microsoft is the first employer I've had who's match was generous enough to consider this. And their match wasn't as good as it is now when I joined (they changed it 2-3 years later), so I still might not have used this strategy even if I'd known about it at the time.

Finally I'd like to apologize to vitamin for hijacking this thread and taking it on a tangent. :-)

- Joel
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