My employer deducted a 401k deduction from my paycheck in error. At the time of the deduction, I was not eligible to participate in the plan. The company's 401k administrator took the deferral and placed it into a plan suspense account and never notified my employer of the issue. This problem was discovered during the audit of the 401k plan in March 2007. My employer is going to refund the deduction to me since it was never placed into my account. The question is--should my 2006 W-2 be corrected since the 401k deferral was never placed into my 401k account? Or, should all of the corrections occur in 2007? Currently, my 2006 W-2 (Box 12) reflects that I deferred $15,000 to a 401k, but only $14,000 actually made it into my account. The ineligible contribution of $1000 was placed into the plan trust's suspense account and will be refunded to me this month

Thanks.

First, nope, your W-2 is fine. The tax form you'll get for the distribution is a 1099-R.

Second, you'll have to wait until you actually get the distribution and 1099-R to know if it's taxable in 2006 or 2007. It's a little weird... if it's distributed by April 15th then the deferrals are taxable in 2006 and any earnings are taxable in 2007, or it's distributed after April 15th then both deferrals and earnings are taxable in 2007. So you'll have to wait and see.

http://www.irs.gov/pub/irs-pdf/i1099r.pdf Page R-4, Corrective Distributions, Excess Deferrals