On April 8, 2021, the IRS announced on the “Employee Plan News” section of its website that the deadline for returning excess deferrals made to 401(k) retirement plans has not been extended along with the general Federal income tax deadline. Consequently, the deadline for removing 2020 excess 401(k) deferrals (i.e., amounts deferred in excess of the Internal Revenue Code Section 402(g) limit, which is $19,500 in 2020, or $26,000 for participants age 50 or older) remains April 15, 2021 – not May 17, 2021.
OBSERVATION: This is somewhat disappointing news, as the IRS did in fact extend the deadline for removing excess 401(k) deferrals for the 2019 tax year in response to the COVID-19 pandemic (see below), and many in the employee benefits community had hoped that this might happen again this year.
Background. Annual tax-free salary deferrals to 401(k) retirement plans are limited to certain maximum amounts, which are set forth in the Internal Revenue Code. Many of these limits are adjusted for inflation each calendar year. (See our chart entitled “Limits and Annual Fees” for a complete list of the current and recent annual limits applicable to 401(k) plans, including the current and recent annual 401(k) deferral limits.)
If the annual 401(k) deferral limits are exceeded for any reason during a calendar year, they generally must be returned by the April 15th of the year following the calendar year of the deferrals. (See our article entitled “401(k) Excess Deferrals” for details.) If not returned by the April 15th deadline, then the excess deferrals are subject to double taxation, along with the imposition of a possible additional ten-percent early distribution penalty. The failure to administer the plan in accordance with its terms might also result in plan disqualification, absent correction efforts made in accordance with official IRS guidance (see our article entitled “EPCRS Overview” for details).
Special COVID-19 Rules for 2019 Tax Year. In April 2020, due to the global COVID-19 pandemic, the IRS extended a number of deadlines, including the deadline for returning excess 401(k) deferrals made in 2019 (see our blog entitled “IRS Extends Various 401(k) Deadlines in Response to COVID-19 Crisis” for details). For excess deferrals made in 2019, the deadline for returns was generally extended from April 15, 2020 until July 15, 2020. The extension gave employers and plan administrators extra time to respond to and correct any excess deferrals made in 2019, in light of the inconvenience and hardship posed by the novel pandemic.
IRS Extends General Federal Tax Filing Deadline for 2020 Tax Year. On March 17, 2021, the IRS announced that the Federal income tax filing due date for individuals for the 2020 Federal tax year had been extended from April 15, 2021 until May 17, 2021. Employee benefits professionals had speculated that, along with the general filing extension, the IRS might be inclined to also extend the deadline for returning excess 2020 401(k) deferrals, as it had previously done for excess 2019 deferrals.
The April 8, 2021 Announcement. Unfortunately, the IRS’ April 8, 2021 announcement clarifies that the April 15, 2021 deadline for returns of excess 401(k) deferrals made in 2020 will not be extended to May 17, 2021. Therefore, to reiterate, any such excess deferrals must be returned by no later than April 15, 2021 in order to avoid possible adverse consequences and sanctions.
BOTTOM LINE: The IRS announcement comes a little late for those who might have been holding out for an extension of time in which to return any 2020 excess deferrals applicable to their 401(k) plans. Hopefully all systems remain in place to enable timely returns of any such excesses on or before the normal deadline.
The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.