IRS finds Form W-2 errors showing 401(k) excess deferrals

In its 401(k) Excess Deferral Project, the IRS’s Employee Plans Compliance Unit (EPCU) has found errors in the 401(k) plan elective deferrals reported in Box 12 of Form W-2. The Excess Deferral Project, which was conducted in 2006-2007, was designed to determine the extent of problems with the reporting of excessive elective deferrals.

Results of the project show that 75% of employers in the sample needed to correct their Forms W-2, the IRS said. Employers incorrectly reported as 401(k) elective deferrals: (1) elective deferrals made to 403(b) or 457 plans, or (2) other nonqualified amounts. Employers also made errors in reporting Social Security wages and deferred compensation, and used incorrect codes.

When an employee’s elective deferrals exceed the annual limit during a calendar year, the employee must include the excess amount in income for the year in which it was contributed to the plan. The employee is also taxed on the earnings on the excess elective deferrals in the year the plan distributes them. If the plan doesn’t distribute the excess deferral by April 15 of following year, the excess is taxable in both the year deferred and the year distributed.

According to the IRS, some employers in the sample had already recognized employees who had made excess elective deferrals to their plan. They corrected this by returning the excess deferrals and issuing a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This form is generally filed for each person to whom a distribution of $10 or more is made.

Source: IRS Employee Plans News, Issue 2013-1, February 13, 2013.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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