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mjolah,

In response to no particular part of my post you wrote, I don't agree. First, the failure isn't supposed to occur, but if left uncorrected, the PLAN risks disqualification. From the IRS website: "Although not the subject of this Snapshot, a plan that does not distribute excess deferrals risks plan disqualification." You can see the context here: https://www.irs.gov/retirement-plans/consequences-to-a-parti...

Yes. I've previously reviewed that page and several others. Nothing there is news to me and none of it changes my understanding.

Note that if left uncorrected, the PLAN risks disqualification means that the consequences are for the PLAN, not the employee. However the PLAN risks nothing if they have not been timely notified. That's because:

1. Corrective distributions are very time-sensitive, and
2. Plans created by two unrelated employers have no mechanism to cross-check.

Even if the IRS had a process to catch excess contributions directly, the earliest they could realistically do anything about it is February of the following year. This doesn't give the employer plans much time for such corrections.

In any case the IRS has little motivation to catch excess contributions themselves in a timely fashion. It costs resources and normally a late catch usually just means more taxes, interest and penalties due the IRS. I doubt the IRS has seriously considered that some employees might switch between employers in the way I suggested and trying to tailor their process for an unusual edge case would seem rather inefficient.

Finally it's important to bear in mind that the tax code has a penalty process for dealing with excess elective 401(k) contributions that you (the employee) fail to report and have distributed timely. In fact the tax code would seem to implicitly relieve the employer of any responsibility for the excess distribution if they have not been notified in time to make the distribution by April 15th of the following year. Instead the burden (and penalty) shifts to the employee.

Also, Second, once the money is OUT of the plan, there is no basis for the matching contribution to remain, as well - and it needs to be forfeited.

Are you just restating what I said for emphasis? The main reason to not ask for a corrective distribution of excess contributions is to let you keep the entire contribution and and match in (both) Plan(s) and avoid tax friction on future gains. The only reason to do this is if the penalty (double-taxation) for failing to obtain the corrective distribution is less than the matching dollars you might forfeit - assuming your contributions were pre-tax.

However if your excess elective employee contributions were all Roth contributions ... those are already included on your W-2 and you ALREADY pay taxes on them in the current tax year. That would seem to say to me that there is no penalty on excess Roth contributions not distributed timely as a corrective distribution. At least there is not if all of your elective contributions were Roth! (I'm not sure what the result would be if part is Roth and part is pre-tax.)

And, Bottom line, not supposed to happen. ...

Seriously? That's your argument? Really?! It can happen. It does happen. All the time. The employer has no way to know if it does happen. Lots of employees are not savvy enough to realize this is a problem. Ergo, it happens. And I'm confident it happens every year because the distribution list I participate on at work *always* has questions about this issue just before taxs are due. Employees just don't catch it until they go to do their taxes and the tax software (or their preparer) actually looks at their W-2s and tells them about their "mistake".

My argument is simply that since the tax code anticipates that these excess contributions will be missed and has a remedy beyond corrective distributions, you should consider using that option instead of the corrective distributions if it benefits you.

Finally, ... Must be corrected when it does or the plan has issue. Matching isn't a reason to do it - as it will be rectified as well.

Seriously? Again, that's your argument? The Plan knows Jack about the excess contribution unless they are notified about it. But as far as I'm aware the IRS doesn't bother notifying Plans about excess contributions that were never self-reported by the employee. And those are the only two sources the Plan has to discover that an excess contribution has occurred.

So basically your argument that the plan has issues ... has some pretty serious issues of its own.

And since contributions (including match) cannot be withdrawn as a corrective distribution after April 15th, the matching contribution is in fact a potential motivation for intentionally making excess contributions when you have two employers during the year.

BTW, you completely fail to address my comments about Roth (and after-tax) excess contributions. No comment? I'm not surprised. The IRS website doesn't seem to address the topic either. However the penalty rules would seem to address it implicitly ... and I just don't see how you could interpret them to apply penalty taxes on such excess contributions.

Also if you haven't noticed I'm not looking to simply parrot what the IRS website says. I'm looking at the rules and looking for what it and the IRS website do NOT say. This would seem to allow you to make some educated guesses about potential loopholes in our tax system. And if you are in a position to take advantage of such loopholes, why not?

- Joel
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