How many months does a plan have to refund excess contributions to HCEs to avoid the excise tax?

To avoid the excise tax on excess contributions made to Highly Compensated Employees (HCEs) in a 401(k) plan, the plan must refund these excess contributions within a specific timeframe. This timeframe is set at 2.5 months after the end of the plan year in which the excess contributions were made. If the plan acts within this 2.5-month period, it can correct the excess contributions and prevent the imposition of an excise tax on the amount refunded.

This provision is designed to encourage timely action and ensure that plans remain compliant with contribution limits. After this period, if the excess contributions are not returned, the plan may incur an excise tax and face additional compliance issues.