TheoDawg Posted April 6, 2018 Share Posted April 6, 2018 This question relates to the recharacterization of Pre-Tax Deferrals to After-Tax Contributions to correct an ADP test violation. Treas. Reg. Section 1.401(k)-2(b)(3)(ii) states that recharacterized excess contributions will be includible in the HCE's taxable income "as if such amounts were distributed" under the regulations applicable to distributions of excess ADP amounts. Does this require that recharacterized excess contribution must be adjusted for allocable earnings like in an actual corrective distribution would be, i.e., recharacterized contributions along with earnings reported on 1099-R, etc.? My understanding is that when recharacterizing correction option used, allocable earnings are not taken into account, i.e., recharacterized amount (and thus taxable amount reported on 1099-R, etc.) equals just the actual excess contribution without earnings. Any insight would be appreciated. Link to comment Share on other sites More sharing options...
Lou S. Posted April 6, 2018 Share Posted April 6, 2018 Since the earnings are not leaving the plan and will be taxable when received I would not think that they would be reported on a 1099-R now. I would think that you need to move allocable earnings from the pre-tax 401(k) source to the after-tax when you do recharacterize . Link to comment Share on other sites More sharing options...
Luke Bailey Posted April 9, 2018 Share Posted April 9, 2018 TheoDawg, your answer can be inferred from 1.401(m)-2(b)(2)(iv)(E). It's a little confusing because it refers back to 1.401(k)-2(b)(2)(iv) and says that you have to use the methods of determining income there, but they seem identical to me. But what does seem clear from this reg is that to the extent the recharacterized deferral sticks as after-tax, you would not distribute earnings, and vice versa. Luke Bailey Senior Counsel Clark Hill PLC 214-651-4572 (O) | LBailey@clarkhill.com 2600 Dallas Parkway Suite 600 Frisco, TX 75034 Link to comment Share on other sites More sharing options...
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