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457B Salary Reduction

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Is it necessary for employer to provide W2C to correct prior year(s) excess salary reductions being refunded by the retirement vendor? Or, does the 1099R the vendor supplies for year refund is made suffice? Any prompt response is greatly appreciated...thanks.

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Assuming this is a government sponsored 457(b) plan and the amounts are over the annual deferral limit under 457(e)(15), I believe the refund is reported on a Form 1099-R. A Form W-2c would only be necessary if an incorrect amount was actually reported on the Form W-2.

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Assuming this is a government sponsored 457(b) plan and the amounts are over the annual deferral limit under 457(e)(15), I believe the refund is reported on a Form 1099-R. A Form W-2c would only be necessary if an incorrect amount was actually reported on the Form W-2.

 

 

it is not government...it is private, non-profit university. I talked to the IRS and they concur that w2c is not needed....vendor refunds the monies and issues 1099R to the employee to file on current year 1040. but, still have concerns on employer responsibilities. Does vendor refund monies to employer since it is essentially employer funds?

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Sorry, in advance.

 

The deadline to return any excess annual deferrals for a 457(b) plan for a non-profit entity is April 15 following the end of the calendar year in which the excess contribution occurred. If the excess is for contributions made in the current year (2011), I would guess that the amounts could be transferred now from the plan's vendor to the employer's general asset account (including earnings on the excess) by the end of the year - it is all employer money anyway since it is a non-profit 457(b) plan. Any portion of that amount which is employee deferral should then be paid as normal taxable wages to the employee in 2011 and adjustments may need to be made with the Form 941's for any FICA tax issues. If the refund to the employee occurs after 12/31/2011, I think the IRS is right to indicate that a Form 1099-R is needed with a code for excess deferrals - I have not researched that, but I do know that refund has to be done by April 15, 2012. The consequence for failing to meet this deadline is that the entire plan falls out of 457(b) and lands under the 457(f) plan requirements (really, really bad news: the participants' accoounts become taxable immediately and worse).

 

If this is for contributions made before 2011, then the plan has an operational error (see the really, really bad news comment above). Although EPCRS (Revenue Procedure 2008-50) has a correction option available for government sponsored 457(b) plans, I don't see a correction option for a non-profit's 457(b) plan. Strategies should be discussed with ERISA counsel for fixing this issue somehow so that the IRS will not ruin the tax-deferred nature of the whole plan for all participants. Maybe recommend stopping all future contributions to that 457(b) plan and adopting a brand new 457(b) plan, FWIW.

 

All responsibilities for the plan rest with the plan sponsor, the employer. If the vendor has an engagement agreement that states the vendor handles any tax reporting for refunds, then the employer should expect that the vendor will report this refund properly, but the employer must take steps to make sure it truly does get done properly and that it gets done on time. Also, the employer should change their procedures such that this excess annual deferral issue will not happen again.

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