How do highly compensated employees report the return of excess contributions due to a failed discrimination test?

The amount of the remedial distribution will be reported as taxable income on Form 1099-R. Form 1099-R will be issued in the calendar year subsequent to the plan year in which the infraction occurred. The form itself will be issued to indicate that the participant has received the remedial amount in the subsequent calendar year, but that the amount is taxable for applicable plan year. For the participant, he or she must include the remedial amount on his or her personal income tax return for the year that the infraction occurred. Please note that FICA tax has already been withheld at the time of the salary reduction and minimum withholding requirements are not applicable to this type of income. Example: If a participant receives a remedial distribution for the 2001 plan year, he or she will receive payment in January 2002. The payment must be claimed on the participant's 2001 personal tax return, though the participant will not actually receive a copy of Form 1099-R until early 2003. ...  more