401K Contributions Exceed Limits

[Garcost48]

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

[itonewbie · Accepted solution]

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.

[Garcost48]

Itonewbie,

Thank you for the reply.  To enter the excess amount on Line 1 of F1040 would I create a second W2 from the employer and enter the amount in Box 1?

GC

[qbteachmt]

@Garcost48 

Nothing that you do here has anything to do with a W2 from the employer, which you are Not providing to your client. That is from employer to employee, and you are not involved. The notification of excess contribution and its removal should result in the employer issuing a corrected W2.

Here:

https://www.investopedia.com/ask/answers/158.asp

[qbteachmt]

Here's another good resource:

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-exceeded-code-402g-li...

[Garcost48]

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

[sjrcpa]

The excess deferral does need to be included as wages  for 2019.

[sjrcpa]

The 1099-R for 2020 for the excess deferral will be coded as Reportable in 2019.

[itonewbie]

No W-2C will be issued.  What the email described is what we had expected.  The excess deferral distributed by April 15 needs to be included on Line 1 of your client's 2019 return.

[jsuttoncc]

How do you recommend including the excess salary deferral in taxable wages on the return? Editing the box 1 wages on the W-2 worksheet in ProSeries? That seems wrong to me. Is there another method to do this in ProSeries? I'm a former user of Lacerte. In Lacerte there was a separate input field from the W-2 worksheet for this called Excess Salary Deferrals. This link has instructions for Lacerte: https://proconnect.intuit.com/community/diagnostics/help/taxpayer-s-401-k-contributions-exceed-the-l...

[Highwy17]

Hi 

Were u able to figure out which specific line ProSeries this excess contribution needs to be entered? I have the same situation for 2020 Tax year. 

Thanks

[rbynaker]

I've seen articles online suggesting that a W-2c will be issued to the taxpayer.  I've NEVER seen it happen that way.  If you have a W-2c, just adjust the numbers accordingly on the W-2 Wks.

If, instead, it happens like itonewbie suggests in the "solution" to this thread (which is how I've seen it done EVERY time) what I do is enter a 1099-R in the current year for the deferral amount with Code P and there's a checkbox down the Wks a little ways, something like "1099-R received for 2021 with Code P."  That will add the amount to wages on the 1040.

[Highwy17]

Will do. Thank you for quick response. 

[ira]

Huge help thank you!

for 2020 - scroll down to where you'll see in bold

ADDITIOANL DISTRIBUTION INFORMATION

see a5.....and there you bill find the Code P or R on a 2021 Form 1099-r

sweet...blood pressure can come down now  🙂

thank you!!

[SaraW]

Hi!  Same thing is happening to me for a client for 2020...(changed jobs in 2020...you know the story)...anyways just had a quick follow up to what you posted as a solution.  Do I do that for the "earnings" reversal too for 2020 or is that something that should be a purely 2021 issue?  In other words, is the "1099-R received for 2021 with Code P" only the amount of the excess deferral?

Also, I know everywhere it says "April 15" is the deadline to do "the correction" but if I'm not mistaken, that's now May 17th because of the extended deadline, correct?

I've had clients in the past that over contribute to Roths outside of their work plan and need to reverse it but this is the first time I've had a client with an issue for a plan through work.  His work also said they would not issue a corrected W-2...which seems to go against what I've read on the IRS' website...but whatever I guess???  That just baffles me.

[qbteachmt]

"Also, I know everywhere it says "April 15" is the deadline to do "the correction" but if I'm not mistaken, that's now May 17th because of the extended deadline, correct?"

You need to sign up for IRS e-newsletters. This came out (they come to you by email) last week:

"Remove Excess Salary Deferrals by April 15, 2021

The total of all salary deferrals a participant makes to various retirement plans – including 401(k), 403(b), SARSEP and SIMPLE IRA plans – is limited to $19,500 (plus an additional $6,500 if age 50 or over) for 2020.

If an individual defers more than this limit for 2020, the excess deferral amount plus earnings must be distributed by April 15, 2021. Excess salary deferrals not withdrawn by April 15 are taxable in 2020 and again when withdrawn. The date to remove excess salary deferrals has not been extended.

Individuals who made salary deferral contributions to two or more retirement plans in 2020 may be most at risk for exceeding the deferral limit. Use our Interactive Tax Assistant to help determine how to correct excess salary deferrals."

[SaraW]

Thank you so much for the info and I'll absolutely look into signing up for that newsletter! 

The icky thing is that my client just received his second W-2 last Friday (I know...VERY late) and we've been working hard to expedite the issue with the retirement plan/HR person. 

So...hypothetically...if logistically the excess deferrals and earnings can't get to him by April 15th (tomorrow), are they considered distributed in 2021, along with the earnings to correct the issue that way?  Or is he just haunted by this until retirement age?  What does that situation look like where we've started the corrective process but he doesn't get the check until maybe next week, after the deadline?  (Going through the interactive tool, it just says you're taxed in the year the excess contributions were made and when they get distributed.)

[qbteachmt]

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-o...

That article then has other resources. Including:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-what-happens-when-a...

[SaraW]

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!

[qbteachmt]

Did you read any of the resources on the Web? General resources, from investment service providers, are often easier to follow than IRS regulation text.

https://www.investopedia.com/ask/answers/158.asp

"I imagine if it's not done in time it's reportable in 2021"

It's reportable every year that it's not Removed. Including 2020.

"If the excess amount is not returned to you by April 15, you could pay taxes on the amount twice—in the year the excess occurred, and in the year it is returned to you."

[SaraW]

Yes I read them.  I think I just may not be articulating where my hang up is very well.  My questions are mainly surrounding what the 1099-R's look like for the following year but again, I think there's a communication disconnect.

Thank you for your time.

[qbteachmt]

"My questions are mainly surrounding what the 1099-R's look like for the following year but again"

You already covered this; it will be marked as for the Prior Year.

[JOFI]

As this situation has just occurred for a client of mine, and his HR payroll office is famously slow and bureaucratic, what would happen if he says nothing?  Has anyone ever heard of the IRS actually catching this and dinging the taxpayer?

[qbteachmt]

"what would happen if he says nothing? Has anyone ever heard of the IRS actually catching this and dinging the taxpayer?"

Whew; I'd whistle if I could. Imagine what happens some 20 years later, because they pay the excess tax (and penalties) for every year it was not removed, and until it is removed, and the earnings are taxable when removed.

They don't need to live with it for the rest of their lives, if they Remove the excess now. Right now, in fact, with the market down, depending on how that was invested, there may be little to no earnings or even a loss (not claimable, of course). Do it while it hurts the least 🙂

[JOFI]

I would believe this if the IRS actually had a system for tracking W-2 forms and tracking the cumulative retirement contributions made for all W-2s in a given year.  Since you are not required to provide that information on a tax return, I very much doubt the IRS is tracking this.  And I am not worried about the IRS coming after a client twenty years after the fact for a $183 overage.

In a separate case, I recently had clients who had been making ineligible Roth contributions for the past 17 years -- they had no idea there was an AGI ceiling.  They voluntarily wanted to make things right after learning about this rule during a workplace retirement seminar.  Did the IRS catch this?  Nope.

[qbteachmt]

"Since you are not required to provide that information on a tax return,"

Because the Employer just did, by submitting all of those W2 forms over all the years, with that Name and SSN on them.

"I very much doubt the IRS is tracking this. And I am not worried about the IRS coming after a client twenty years after the fact for a $183 overage."

Okay.

[JOFI]

I would be more inclined to take your view seriously if you could provide a specific example where this has happened.

And since the IRS is all powerful and all seeing, please explain how they could miss a married couple making Roth IRA contributions for 17 years, even though they were pulling in $300K a year or more for all 17 years.

[qbteachmt]

"if you could provide a specific example where this has happened."

Where "this" what, happened, to whom? What or which "view" is this? Are you referring to my view that right now, this is a negligible amount and easily dealt with? Or, referring to my correction that this info has, in fact, been reported to the IRS?

"please explain how they could miss a married couple making Roth IRA contributions for 17 years"

I've been a plan benefits coordinator. I've seen lots of errors on the part of brokerages and managers. As a business financial consultant, I've caught banks making lots of errors, and even ADP didn't want their money back when I found their errors. I cannot explain anything 🙂

[qbteachmt]

@JOFI 

I do enjoy providing resources, and here is one on "the Strategy" and maybe your client has the right idea:

https://www.irafinancialgroup.com/learn-more/self-directed-ira/roth-ira/excess-roth-ira-contribution...

Also, I overlooked mentioning the Form 5498 also is reported to the IRS. They "know" about the retirement accounts. Whether they have the man power to do anything about it, remains to be seen.

[JOFI]

I was asking if you, or anyone on this board, has ever been aware of the IRS contacting a taxpayer to inform them of excess contributions to a workplace retirement plan for a prior tax year and levying additional taxes and penalties.

I understand this is a theoretical risk, but as I have not seen an actual case where the IRS has actually taken action against a taxpayer, I am not inclined to view it all that seriously.

[qbteachmt]

"I was asking if you, or anyone on this board"

You are deep inside of someone else's topic from two years ago. Perhaps you want to start a new topic, use the Title of a new topic to ask that question, provide some content in the input panel, and see who answers. I would ask that in the Tax Topic section of this community, since it has nothing to do with using ProSeries.

Also, are you signed up for IRS or any government e-newsletters? I know I get these types of things regarding tax preparer fraud, schemes, and CFPB, FTC, DOL, etc all have this type of notification. I don't know that individual taxpayer notifications would be released, but these stories are pretty interesting.

I think I know someone who might like to engage with you.

@BobKamman please come to the courtesy desk for the white phone...