Excess Deferral Treatment

[Uncle Sam]

How does an excess deferral get picked up on the return?

Client, under 59 1/2, had 2 jobs in 2008, and made contributions as follows:
401(k) - $ 3,600
403(b) - $ 13,000

Excess of $ 1,100

Shouldn't the $ 1,100 get picked up as subject to an excise penalty from Form 5329?
I've explained to the client the issue, and doesn't want to adjust anything for 2008, or have any W-2s changed.

[JG EA]

Here's something that might help:

http://www.irs.gov/retirement/participant/article/0,,id=151786,00.html

The year is wrong but it says:

If you do not take out the excess deferral by April 15, 2008, the excess, though taxable in 2007, is not included in your cost basis in figuring the taxable amount of any eventual distributions from the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan.

Pub 525 has more information. See page 2, 9, &10. .

Also, TTB 13 has some interesting info including the statement that it is the employee's responsibility to have this correct.

Also: Was your client in 403 for 15 years? This would increase the limit for that plan by $3000, but I'm not sure how that would translate for the overall limit - just a thought.

[Snaggletoof]

Cannot Defer

I believe there is no penalty on the excessive deferral. I believe the only effects are:

1) Taxpayer must claim $1100 as income on line 21 as "excess deferral" if the deferred amounts have been deducted from taxable wages on the W-2.
2) Taxpayer gets no "basis" in the retirement plan, i.e. if at such time he has withdrawn the total amount, he has to pay on this $1100 again.

[Uncle Sam]

Excess Deferral Treatment

Snaggle - I've been researching this the last couple of days -
The $ 1,100 is reported as line 7 income. I'm supposed to treat it as 1099-R income, Box 7 code 8. It actually shows up on line 7, not line 16 or 17.
Regarding the penalty - have not been able to find a concrete definitive answer.
Both Pub 560 and 590 don't describe the penalty amount for an excess contribution for a Qualified Plan.
I have mentioned to client regarding the problem, and she doesn't wish to change anything on W-2s or have employers change anything. All she's done is call it to their attention to avoid for 2009.
I KNOW it's wrong - but I can only push the client so far.
I've explained that she's paying TWICE - once on the excess, then again when distributed.

[JG EA]

Regarding the penalty - have not been able to find a concrete definitive answer.

Would this be it?Page 10 of 525:

Even though a corrective distribution of excess deferrals is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions.

Also the code they would put on would be: "Enter Code 8, P, or in some cases D, in box 7" and so no penalty.