Employee Benefits-Reminder On New Rules For Reporting Distribution of Excess Contributions/Excess Aggregate Contributions

The IRS’s Employee Plans News (Volume 9/Spring 2009) reminds us that the rules for reporting the distribution of excess contributions or excess aggregate contributions by a 401(k) plan have changed. Generally, an “excess contribution” is a highly compensated employee’s elective deferrals which exceed the amount allowed by the 401(k) plan’s actual deferral percentage (ADP) test, and an “excess aggregate contribution” is a highly compensated employee’s matching contributions and/or after-tax employee contributions which exceed the amount allowed by the 401(k) plan’s actual contribution percentage (ACP) test. The plan can make corrective distributions to rectify either type of excess.

According the Employee Plans News, beginning in 2009, if a 401(k) plan distributes any excess contributions or excess aggregate contributions, along with earnings thereon, the distribution must be reported on Form 1099-R as taxable to the recipient in the year of distribution. The 2009 Form 1099-R (for distributions made in 2009) must be provided to recipients by February 1, 2010 (since January 31, 2010 is a Sunday).

The payer of the distribution of excess contributions or excess aggregate contributions should complete Form 1099-R by:

  • stating the amount of the distribution in Box 1;
  • reporting the taxable amount of the distribution in Box 2a; and
  • classifying it as taxable in the year distributed by using Code 8 in Box 7.

Note that a separate Form 1099-R must be used for a distribution from a designated Roth account.

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