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401K Contributions Exceed Limits

Forum|Forum|6 years ago
February 15, 2020
1 reply
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My client, under age 50, put $20,613 in their 401K for 2019 which has exceeded the $19,000 limit. I have explained what he needs to do to get this corrected before April 15th but if he doesn't how is the over contribution of $1,613 handled in Pro Series?

I don't see any forms or calculations for this, do I just show as income additional income on the Schedule 1 Line 8?

Thanks

GC

ProSeries Professional

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Best answer by itonewbie

I suppose your client had this excess deferral because he changed job during 2019. Otherwise, his employer's 401(k) plan could be disqualified as a result of the excess deferral.

He needs to notify his employer(s) by March 1, so that corrective distribution(s) of the excess deferral along with allocable earnings could be made by April 15.

The excess deferral should be reported on Line 1 of F.1040 of 2019, not Line 8 of Sch 1. The earnings, on the other hand, would be reported only on his 2020 return. The 10% excise tax on distribution will not be applicable in this case.

In the event corrective distribution(s) is/are not made by April 15, the excess deferral will be subject to tax again in 2020 (in addition to 2019) because your client would be treated as not having a basis in the distribution, along with the earnings.

There will be no 1099-R for 2019. Two 1099-Rs will be issued next year for 2020 - one for the excess deferral with a Code P, which is for amount taxable in 2019 and another for the earnings taxable in 2020.

Your client has every incentive to make sure this is done correctly and within the prescribed time frame.

itonewbieAnswer

Level 15

I suppose your client had this excess deferral because he changed job during 2019. Otherwise, his employer's 401(k) plan could be disqualified as a result of the excess deferral.

He needs to notify his employer(s) by March 1, so that corrective distribution(s) of the excess deferral along with allocable earnings could be made by April 15.

The excess deferral should be reported on Line 1 of F.1040 of 2019, not Line 8 of Sch 1. The earnings, on the other hand, would be reported only on his 2020 return. The 10% excise tax on distribution will not be applicable in this case.

In the event corrective distribution(s) is/are not made by April 15, the excess deferral will be subject to tax again in 2020 (in addition to 2019) because your client would be treated as not having a basis in the distribution, along with the earnings.

There will be no 1099-R for 2019. Two 1099-Rs will be issued next year for 2020 - one for the excess deferral with a Code P, which is for amount taxable in 2019 and another for the earnings taxable in 2020.

Your client has every incentive to make sure this is done correctly and within the prescribed time frame.

---------------------------------------------------------------------------------Still an AllStar

G

Garcost48Author

Level 3

My client finally heard back from his company, they sent him a refund check, and will not send him an amended W2. Their email states" The full amount of your deferrals, as shown on your original W2, must be included in your gross income for 2019. You will receive 2 1099-R's for TY 2020. One will cover the excess deferral, and the other covering the growth on the excess deferrals.

Will this take care of it, or do I need to add the excess amount to his wages in box 1?

Thanks

GC

S

SaraW

Level 3

It's considered Excess for the year made for. Example: your Roth client puts into Roth today for 2020, then you do the tax return and they do not qualify. The Excess is for 2020; the Earnings are taxed for 2021.

They don't need to live with it for the rest of their lives, if they Remove the excess. They pay the excess tax until it is removed, and the earnings are taxable when removed.

Did you click the link in that article? The Excess Deferral link goes here:

https://www.irs.gov/retirement-plans/how-much-salary-can-you-defer-if-youre-eligible-for-more-than-one-retirement-plan

That article then has other resources. Including:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-what-happens-when-an-employee-has-elective-deferrals-in-excess-of-the-limits

Thanks for your help and info. I read those articles that you listed.

I think what I'm "hung up" on is what that looks like in terms of tax forms and such for the following year IF it's not corrected in time (also, I've never had a client that's had to fly this close to the sun for the deadline). I get the excess deferrals would be taxable as "excess salary deferrals" in 2020...easy. And I understand what would happen if the issue was corrected in time by doing the "1099-R code P in 2021" thing. So if it's not corrected in time, is that something that's denoted differently on a 2021 1099-R? I imagine if it's not done in time it's reportable in 2021, along with the earnings that would've already been reportable in 2021? Like...Are there special codes that get recorded on that 2021 1099-R or other additional information that gets included so that the IRS knows my client isn't subject to the "excess tax" anymore???

Please forgive me for my lack of knowledge surrounding this issue. I've just never run into this situation before and am trying to learn how best to advise my client and prepare the tax returns properly moving forward. Thank you again for your input!

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