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Employee Plans Compliance Unit (EPCU) - Completed Projects - 401(k) Excess Deferrals Project

401(k) Excess Deferral Project Summary

The EPCU 401(k) Excess Deferral Project began in March of 2006 and ended in September of 2007. The project was designed to determine the extent of problems with the reporting of excessive elective deferrals in Box 12 of the Forms W-2.

401(k) elective deferrals are reported on the Form W-2. There is a limit a participant can contribute each year set by IRC section 402(g). If a participant's elective deferral exceeds the applicable limit for the tax year, the excess deferral is includible in the employee's income for the year in which it was contributed to the plan. The earnings are also taxable in the year distributed. If the distribution occurs after April 15th of the year following the year of the excess deferral, the excess is taxable in both the year of deferral and the year distributed. Also, a trust shall not constitute a qualified trust unless the plan provides that the amount of elective deferrals may not exceed the amount of the limitation in effect under IRC section 402(g).

The project was designed to:

1) Identify Form W-2 reporting errors
2) Determine the causes of the reporting errors
3) Obtain correction
4) Identify trends

The Project goal was also to identify participants with excessive elective deferrals and bring them back into compliance. This also involved reviewing the plan’s operation to ensure future elective deferrals were not excessive.

Results of the 401(k) Excess Deferral Project
75% of the employers contacted in this project filed over 26,000 Forms W-2C to correct an incorrect entry. In addition, most of these employers became aware of software and/or data transmission problems and took action to fix those problems for future Form W-2 filings. 

Issues included 403(b) or 457 amounts on the Form W-2 coded as a 401(k) elective deferral, other amounts (most commonly non-qualified plan amounts) on the Form W-2 coded as a 401(k) elective deferral, instances where data became corrupted as it moved back and forth from the employer and their third party payroll vendor, where payroll software classified section 403(b) and 457 amounts as 401(k) elective deferrals, and elective deferrals that were excessive and required a distribution to each affected participant along with the filing of Forms 1099-R.

Page Last Reviewed or Updated: 14-Mar-2017