I have an employee who has been allowed to contribute the maximum ($15,500) to his 401k this year. Unfortunately, the employee also falls in the highly-compensated bracket for 2007. Without intervention, his deferral is projected to cause the employer plan to fail the ADP test. Our plan administrator has advised they anticipate issuing a refund for the excess deferral (in this case defined as the amount that causes our plan to fail the ADP test) and will issue a 1099 the first quarter of 2008.
I would like to minimize the "taxable impact" to the HCE by attempting to refund the excess deferral. Is there any risk in estimating the expected refund and having our payroll service simply reverse this through regular payroll processing (there are two paydays left in 2007)? In theory, the HCE could take the proceeds and re-invest in another vehicle (like a top-hat plan).
It may be too late to do anything now, but I am curious if anyone reading this forum has had a similar experience and could advise on a possible outcome. Thanks!
I would like to minimize the "taxable impact" to the HCE by attempting to refund the excess deferral. Is there any risk in estimating the expected refund and having our payroll service simply reverse this through regular payroll processing (there are two paydays left in 2007)? In theory, the HCE could take the proceeds and re-invest in another vehicle (like a top-hat plan).
It may be too late to do anything now, but I am curious if anyone reading this forum has had a similar experience and could advise on a possible outcome. Thanks!
