Excesss 401-K contributions

[Camp1040]

TP had 2 employers and contributed excess 401-K contributions. Too late to get a corrected W-2 c plus the administrators said that they withheld correctly.

I have read the excesss 401-k contribution discussions and I still can't figure out how to add the excess contributions to his wages for 2023.

The corrective distributions will have to be initiated by the TP at a later date.

Bottom line: How do I add the excess to Wages?

Thank you

[dascpa · Accepted solution]

I would plan on an extension for this client.  Then I'd create (temporarily) a 1099-R from the 2nd employer and put the excess deferral as taxable income with a Code 8.  The taxpayer will (eventually) receive the proper 1099-R for 2023 and then next year a 2024 1099-R for the earnings on the excess deferral.

[rbynaker]

You used to put this on a fake 1099-R with code P and then scroll down and check a box that says something like "2024 1099-R received with code P".  Maybe you still do.  But now this goes on 1040 Line 1h.  See if there's something you can drill down into from 1h and not have to go the "pretend" 1099-R route.

[Camp1040]

I really want to avoid an extension since this TP has 6 state returns.

I'm trying to avoid the "fake1099R" so drilling down on line 1h brings me   return of contributions and requires a 1099-R and code 8 as @dascpa  posted. I'm considering other earned income but I really don't feel that route. I'm going to sleep on it...so tired today.

Thank you for the late evining response.@rbynaker & @dascpa 

Who would issue the "fake" 1099-R, the employer or the administrator if I go that route so I can efile the return on time?

[sjrcpa]

The Plan Administrator, of the Plan where he withdraws the money.

[Camp1040]

Going to plan on an extension but pushing client so we can file by the deadline. TP is contacting Plan administrator B to withdraw excess contributions and get a 1099-R with a code 8. If that doesn't happen in a timely manner I will attemp the fake 1099-R, just not sure how to create it, I do who the administrator is and the EIN, just doesn't see right.

I have had excess contribution issues before, but with one employer and plan was considered discrimantory for highly compensated employees and the administrator issued 1099-R and the amount us to flow right to line 1.

Putting this aside again, thank you all for the input.

[IRonMaN]

I'm just thankful that you are dealing with the issue instead of Jim (not that I wish the issue on anyone).  This would have really messed up his schedule 😀

[sjrcpa]

You won't get the 1099-R until next year.

[Camp1040]

Oh shoot, I forgot that is a 2024 distribution. I'm going to go with the line 1h and a 1099r code8 and double taxation with but avoid pentaly for over contribution. The amount is approx 5K.

This is really messing with my productivity, I can't imagine WWJD.....What would Jim do with the disruption to his production

[qbteachmt]

"Too late to get a corrected W-2 c plus the administrators said that they withheld correctly."

The taxpayer would be responsible for setting up the new job knowing there is already some contribution for the year from the prior job.

The corrected W2 would be issued if the taxpayer had notified the plan administrator by March 1.

"The corrective distributions will have to be initiated by the TP at a later date."

From: https://www.irs.gov/retirement-plans/consequences-to-a-participant-who-makes-excess-deferrals-to-a-4...

"Additionally, the corrective distribution must be made be made no later than April 15th following the close of the calendar year during which the excess deferral was made. See IRC Section 402(g)(2)(A)(ii). For example, excess deferrals made during 2016 must be distributed by April 15, 2017. This April 15th deadline is not postponed by extending the filing of the employee's federal income tax return."

[qbteachmt]

Just in case, I ran through the ITA for you:

"Excess Distribution

To correct the excess deferral, you must notify one or more of your plans. If the plan permits excess deferral distributions, the plan must:

• Return the excess amount, along with any income earned on that amount, by April 15, 2024.
• File a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for the year the plan returns the excess contribution to you.

If the excess deferrals are not corrected timely:

• The excess amount is taxable to you in the year you made the contributions and in the year you receive them as a distribution from the plan (unless the excess deferral was a designated Roth contribution).
• The earnings are taxable in the year they are distributed.

Reporting Requirements

You report the distribution listed on Form 1099-R on the wage line of your return if you receive it by April 15th after the year you contributed it to the plan:

• Report your excess deferrals in the year you made them.
• But, report the earnings on your excess deferrals in the year you receive them.

Corrective Distribution

When a plan returns excess deferrals to you, they're considered corrective distributions. They aren't considered a distribution from your plan.
Therefore:

• You can't roll the distribution over into another plan,
• You won't be subject to the 10% additional tax for early distribution,
• Your distribution won't have the required 20% federal income tax withheld, and
• Your distribution isn't subject to a spousal consent requirement."

[Camp1040]

Thank you!

If the excess deferrals are not corrected timely:

• The excess amount is taxable to you in the year you made the contributions.

That is the big question I have, how to report the excess distribution on the 2023 tax return if not timely?

The client is contacting the plan admin for the corrective distribution but that form won't appear until 2025. I would think that is a timely correction (if it happens) and I would file the return as is and then report the 2024 1099-R with the correction next year?

A corrected W-2 is not an option...that is a quote from the employer.

I will reseach the links once I get caught up. Thank you.

[qbteachmt]

You can stop looking for corrected W2, because your client missed the deadline. The employer has taken a valid position.

The 1099-R will be for the corrective distribution, so that will be 2024. The point of "timely" corrective distribution is to make the excess moot.

"I would file the return as is"

If it is done in time, then the excess is no longer excess. Otherwise, the excess deferral is taxable for 2023 and for the 2024 distribution. The earnings are taxable when distributed.

"Timely" means by April 15. He should contact them NOW.

[qbteachmt]

Expand this topic for Making Excess 401(k) Taxable:

https://accountants.intuit.com/support/en-us/help-article/other-articles/entering-keogh-sep-simple-p...

[Camp1040]

Yes on the W-2C..no go .

Client is working on the corrective distribution as I type!!😊

[Camp1040]

Follow up...not good

The employee with the excess contribution due to two jobs was told by the plan administrator that they can't help him and that he needs to contact his employer. His employer said they can't help.

My advise to him is to call Fidelity back and get another rep who is willing to put some traction into resolving his issue. If he can't get it resolved by the 4/15 deadline it looks like a double taxable situation on the excess. And I thought I had this issue solved.😣

[IRonMaN]

At times like this you have to ask yourself - what would Jim do? 😁

[sjrcpa]

@Camp1040 He needs to tell them he has to withdraw excess 2023 deferrals plus earnings. The Employer should also chime in on this with the Plan Administrator.

The Plan may not otherwise permit withdrawals. That might have gotten lost in the translation.

[Camp1040]

The Fidelity rep who is probably a part timer who did not want to deal with the situation on Friday, told the TP that the IRS would automatically send him the excess contribution, so I know all the other info they gave is not reliable. 

I'm trying to have client add me to another call on monday.

[qbteachmt]

"told the TP that the IRS would automatically send him the excess contribution"

Ha ha ha. Are you sure that isn't the same Schwab office I've had trouble with? Sheesh, aren't these people supposed to be trained? Supervised?

[rbynaker]

I'll be shocked if you can get this resolved by 4/15.  Either way, the excess contribution goes on the 2023 1040 Line 1h.  If corrected after 4/15 it gets taxed AGAIN in the year of distribution.  NerdWallet has a good "plain language" article that I've used to have the client send to their plan administrator when the admins seem to be clueless:

https://www.nerdwallet.com/article/investing/excess-401k-contribution-what-to-do

BTW, contrary to what the article says, I've NEVER seen a corrected W-2 when this happens.  If you do get a corrected W-2 then you'll increase Line 1a and have nothing in Line 1h.

You're not going to get any traction with Fidelity.  It's the employer's plan so the employer has to initiate the correction.  For whatever reason this seems to take weeks/months and a series of follow-ups.  Recently there seems to be a lot of push-back by the big retirement companies.  The last one I had never did get the correction done, she finally gave up and 4/15 passed so she'll pay tax on that income twice.

I have one this year that's in progress.  I've pestered my client three times about it, "hey, get this done ASAP because it can take a while" but nothing yet (I don't know if it's the client or the employer that's dragging feet).

I've seen on other lists where tax practitioners have a Jan/Feb email that goes out to everyone reminding them to check their W-2s for excess retirement contributions.  I may adopt that next year.  Seems like I have at least one of these each year and it's always a nightmare (and I don't have that many clients!)

Rick

[Camp1040]

@rbynaker Thanks for the link, I know a W-2C is out of the question, but I had TP ask employer anyway....I think the laughed.

[rbynaker]

---

@Camp1040 wrote:

The Fidelity rep . . . told the TP that the IRS would automatically send him the excess contribution

---

Ugh.  It's asinine stuff like this that makes our job so much harder.  Our clients get two very different stories from sources that are supposed to be trusted professionals.  I've tried quoting 402(g) but that's generally way over their heads so that's where the NerdWallet article comes in handy.

Rick

[Camp1040]

Agree, I read most of 402(g) today and sent highligts to TP, I think he will be happier (not a good choice of words) with the nerd wallet link I sent him.

Thanks for the info.

[qbteachmt]

Is your person over 50? Over-contributed is including the catchup contribution amount?

I like Investopedia articles.

[Camp1040]

I wish he was..........42

[Rosario - CSLP]

Hi  there,

The client would get a 1099-R in 2024 for this excess contribution in 2023, but where do we enter in the 2023 return that the client has taken out the excess in a timely manner (by April 15th?)

I am trying to find the place to enter this information in TY 2023.

Thank you!

[sjrcpa]

You don't. You just enter the excess contribution as taxable income.

[Camp1040]

@sjrcpa  Replied "You don't. You just enter the excess contribution as taxable income."

If the excess is removed in a timely manner, since I have been doing a lot of reading on this issue, the response as I undstand it should be appended with 2024 

I don't know how to cross out, I have read so much I got mixed up. You enter the excess as @sjrcpa said on the 2023 return, then in 2024 you should get a 1099-R with a code P that states the income was taxable and included in 2023, You will also get another 1099-R for the earnings on the distribution, not sure what code but no penalty.

Sorry for shooting from the hip.

[qbteachmt]

@Rosario - CSLP 

In your own topic, here:

https://accountants.intuit.com/community/tax-talk/discussion/excess-401k-contributions/00/297720

I put the links to the Help article for how to make your entry. You click the links, and if the topic has condensed info, you click to expand the subsections.

Then, you can update your own topic if you still run into an issue.

[Rosario - CSLP]

Thank you, very much, qbtaechmt!