IRS Finds High Percentage of Errors on W-2 Reporting of 401(k) Elective Deferrals

Many employers that sponsor 401(k) retirement plans make mistakes in the way they report elective deferrals on Form W-2, the federal tax agency’s Wage and Tax Statement sent to employees.

IRS on Feb. 13 said on its website that its Employee Plans Compliance Unit sampled filings from employers that provided Forms W-2 and found 75 percent needed to correct these forms because they:

• reported that some employees had elective deferrals that exceeded the annual limit;
• failed to use the code “D” in Box 12 when reporting 401(k) elective deferrals;  or
• incorrectly reported in Box 12 elective deferrals made to 403(b) or 457 plans or other non-qualified amounts.

The EPCU’s 401(k) Excess Deferral Project, which began in March 2006 and ended in September 2007, found that employers surveyed also made errors in reporting Social Security wages and deferred compensation and by using incorrect codes.  To correct their previously filed Forms W-2, employers filed more than 26,000 Forms W-2C, the Corrected Wage and Tax Statement, IRS said. The agency suggested that Form W-2 filers can avoid some of these errors by following the Form W-2 instructions.

IRS said employers notified of problems the project identified then fixed software and data transmission problems with their third-party administrator or payroll vendor that were causing the errors. The employers also took action to make sure these problems do not affect future W-2 filings, IRS said. Some employers in the sample already had recognized employees who had made excess elective deferrals to their plan and corrected the situation by returning the excess deferrals and issuing a Form 1099-R.

When an employee’s elective deferrals exceed the annual limit during a calendar year, the employee must include the excess amount in income for the year in which it was contributed to the plan. The employee is also taxed on the excess elective deferrals as income in the year the plan distributes them.

Finding out More

Additional information is available from the following sources:

 • IRS 401(k) Plan Fix-It Guide;

• information on correcting plan errors using the Employee Plans Compliance Resolution System; and

• other Form W-2 errors found in this project

To read the complete story on Thompson’s HR Compliance Expert, click here.

To learn more about IRS programs to deal with operational compliance, see¶1110 in the Pension Plan Fix-It Handbook.