Opps...Over 401K 50K Contribution Limits...what now?

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Opps...Over 401K 50K Contribution Limits...what now?

Postby HopeToGolf » Sat Dec 29, 2012 10:33 am

This year I was in a position (and made a point) to maximize pre-tax, after-tax and employer contributions up to the 401K total contribution limit (50K). For various reason, I cannot change my contribution rates during the year in order to ensure stay under the maximum. Additionally, my employer has another plan that I expected to "catch" the excess if I went over. It didn't happen and now my plan administrator shows I am over the limit.

Does anyone know what happens in this situation?

I went to rollover/convert the after-tax funds to Roth and had the transaction confirmed and looked at my total contributions and subsequently cancelled the transaction. If my employer or plan administrator are going to need to fix this mistake, the last thing I want to deal with are funds moving back and forth between the 401K and Roth with the potential of the IRS on my back for a few Ks. The disappointing part of this is the plan administrator asked me to call my benefits department.......nooooooo....he and I both acknowledged that was not the answer I wanted to hear.
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby livesoft » Sat Dec 29, 2012 10:46 am

You might want to google "corrective distribution". Here's one result: http://www.irs.gov/Retirement-Plans/Pla ... -Deferrals

[link fixed by admin LadyGeek]
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby PaddyMac » Sat Dec 29, 2012 6:36 pm

If you're earning enough to max out the 401k at 50K, then check that you haven't earned too much to contribute to a Roth. I find we hit the Roth limit before the 50K limit, but YMMV.
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby Alan S. » Sat Dec 29, 2012 8:04 pm

You have an "Excess Annual Addition" to the plan. If you rolled out after tax contributions to a Roth IRA, you would probably still have enough in the plan to get your corrective distribution from the plan and thereby avoiding an excess Roth contribution. Here is the Pub 525 paragraph on this situation, with 2012 limit increased to 50k:

Excess Annual Additions(p10) Excess Annual Addition

The amount contributed in 2011 to a defined contribution plan is generally limited to the lesser of 100% of your compensation or $49,000. Under certain circumstances, contributions that exceed these limits (excess annual additions) may be corrected by a distribution of your elective deferrals or a return of your after-tax contributions and earnings from these contributions.
A corrective payment of excess annual additions consisting of elective deferrals or earnings from your after-tax contributions is fully taxable in the year paid. A corrective payment consisting of your after-tax contributions is not taxable.
If you received a corrective payment of excess annual additions, you should receive a separate Form 1099-R for the year of the payment with the code "E" in box 7. Report the total payment shown in box 1 of Form 1099-R on line 16a of Form 1040 or line 12a of Form 1040A. Report the taxable amount shown in box 2a of Form 1099-R on line 16b of Form 1040 or line 12b of Form 1040A.
Even though a corrective distribution of excess annual additions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions.
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby HopeToGolf » Sat Dec 29, 2012 9:39 pm

PaddyMac wrote:If you're earning enough to max out the 401k at 50K, then check that you haven't earned too much to contribute to a Roth. I find we hit the Roth limit before the 50K limit, but YMMV.


I am "backdooring" the $5K traditional IRA max and the in service withdrawals of my after-tax contributions.
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby HopeToGolf » Sat Dec 29, 2012 9:49 pm

Alan S. wrote:You have an "Excess Annual Addition" to the plan. If you rolled out after tax contributions to a Roth IRA, you would probably still have enough in the plan to get your corrective distribution from the plan and thereby avoiding an excess Roth contribution. Here is the Pub 525 paragraph on this situation, with 2012 limit increased to 50k:

Excess Annual Additions(p10) Excess Annual Addition

The amount contributed in 2011 to a defined contribution plan is generally limited to the lesser of 100% of your compensation or $49,000. Under certain circumstances, contributions that exceed these limits (excess annual additions) may be corrected by a distribution of your elective deferrals or a return of your after-tax contributions and earnings from these contributions.
A corrective payment of excess annual additions consisting of elective deferrals or earnings from your after-tax contributions is fully taxable in the year paid. A corrective payment consisting of your after-tax contributions is not taxable.
If you received a corrective payment of excess annual additions, you should receive a separate Form 1099-R for the year of the payment with the code "E" in box 7. Report the total payment shown in box 1 of Form 1099-R on line 16a of Form 1040 or line 12a of Form 1040A. Report the taxable amount shown in box 2a of Form 1099-R on line 16b of Form 1040 or line 12b of Form 1040A.
Even though a corrective distribution of excess annual additions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions.


Thanks Alan.

I just downloaded this pub and my plan docs. Once I realized I was over the limit, I cancelled my last in service withdrawal to Roth to keep the $$ in the plan so there is enough after tax for the problem (the rest is pre-tax). I think the open questions are how will my plan handle the corrective distribution, will I have to tell them to fix it, will this somehow end up with double taxation due to my plan and administrator not cutting me off and how much time will I have to spend fixing this. For 2013, instead of trying to max out, I am considering reducing my contributions to land a few Ks short of the max so I don't have to deal with this. It it a "first world" problem to have since it means my comp was higher than expected but the thought of calling my benefits team and potentially filling out more forms is flat out unappealing.
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby Alan S. » Sun Dec 30, 2012 6:19 pm

This corrective distribution is the responsibility of the plan administrator, and you are under no responsibility to contact them. They have almost 12 months in which to make the distribution if they choose, and there will be no double taxation. The earnings calculation they do should not include any "gap period" income, ie earnings that accrue after 12/31/2012. This also does not affect your 2012 tax return, since the distribution will be taxable in the year distributed (2013), and there will be no additional amount distributed even if they wait several months to do it.

The plan should have a formula in determining how much of the distribution comes from pre tax deferrals, earnings or after tax contributions. You probably do not have a choice on that variable. Some plans take awhile to address this since the calculation in how far over you are also depends on including forfeitures from other participants who leave the company. You will not get the 1099R until Jan, 2014, but for tax planning purposes, you will probably know the amount of additional income to be taxed in 2013 by around June when the actual distribution is made. They may contact you about withholding when they are ready to make the distribution, but you can waive withholding if you wish. The default rate is 10% (not the 20% used for eligible rollover distributions).
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby Skyler » Sun Dec 30, 2012 6:27 pm

HopeToGolf wrote:This year I was in a position (and made a point) to maximize pre-tax, after-tax and employer contributions up to the 401K total contribution limit (50K).


Newbie here and apologies if this sounds naive.

IRS says "The limit is $17,000 for 2012 and $17,500 for 2013."

How is your contribution limit 50k?
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby LadyGeek » Sun Dec 30, 2012 6:44 pm

Skyler wrote:Newbie here and apologies if this sounds naive.

Questions are always welcome. The hardest questions to answer are those not asked.

What you say is accurate, but the IRS looks at everything. There's more to it than your 401k. Take a look at livesoft's link from earlier in the thread. In human readable form: 401(k) Resource Guide - Plan Participants - Limitation on Elective Deferrals, scroll to the bottom of the page:

IRS wrote:Additional limits. There are other limits that restrict contributions made on your behalf. In addition to the limit on elective deferrals, annual contributions to all of your accounts - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts - may not exceed the lesser of 100% of your compensation or $50,000 for 2012 and $51,000 for 2013. In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. The compensation limitation is $250,000 for 2012 and $255,000 for 2013.
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby Bill M » Sun Dec 30, 2012 11:35 pm

I've been exceeding the $50K limit (the "415(c)(1)(A) limit") every year for my 401k. Intentionally. My company allows 50% of pay to be contributed. Contributions are automatically switched from before-tax (or Roth) to after-tax when I hit the $17K limit. But all of the contributions are invested for at least part of the year.

The company sends me a "corrective distribution" around April-May of the following year. It doesn't take any prodding or other action on my part. The distribution is calculated as (1) my total contributions, plus (2) company matching contributions, less (-3) the $50K maximum, plus (4) some interest on the amount from January 1. This amount is subtracted from the after-tax contributions to the plan, and income tax is due on the interest portion (4) in the year of the distribution.

As I see it, the excess contribution was in invested and generating earnings for most of year, and also for 4-5 months of the next year; the earnings get to stay in the savings plan. Call it a backdoor contribution to a tax-deferred account. So as long as the earnings exceed the (minimal) interest they pay on the excess, I make out.
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby Skyler » Mon Dec 31, 2012 11:05 am

LadyGeek wrote:
Skyler wrote:Newbie here and apologies if this sounds naive.

Questions are always welcome. The hardest questions to answer are those not asked.

What you say is accurate, but the IRS looks at everything. There's more to it than your 401k. Take a look at livesoft's link from earlier in the thread. In human readable form: 401(k) Resource Guide - Plan Participants - Limitation on Elective Deferrals, scroll to the bottom of the page:

IRS wrote:Additional limits. There are other limits that restrict contributions made on your behalf. In addition to the limit on elective deferrals, annual contributions to all of your accounts - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts - may not exceed the lesser of 100% of your compensation or $50,000 for 2012 and $51,000 for 2013. In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. The compensation limitation is $250,000 for 2012 and $255,000 for 2013.


Thanks LadyGeek.

Here is where I stand today.

My Contributions $17,000.00
Employer Contributions $8,080.18

In addition, I have a Roth IRA contribution of $5,000.00

That's about it, which adds up to $31,752.28. Does this mean I could have contributed another $18,247.72? Is it too late to do that?






Thanks
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby The Wizard » Mon Dec 31, 2012 11:17 am

I'm in a 403(b) plan, not a 401(k).
The trick to getting close to the $50K annual contribution on these plans has to do with the employer having mandatory contributions to start with. Mine REQUIRES me to contribute 5% of my salary and they kick in 10% above & beyond.
Additionally, I can OPTIONALLY contribute up to $23,000 more per year being that I'm really old.

Perhaps 401(k) plans have similar rules...
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby dickenjb » Mon Dec 31, 2012 11:37 am

Skyler wrote:Here is where I stand today.

My Contributions $17,000.00
Employer Contributions $8,080.18

In addition, I have a Roth IRA contribution of $5,000.00

That's about it, which adds up to $31,752.28. Does this mean I could have contributed another $18,247.72? Is it too late to do that?


The $50K limit is for employee and employer contributions to a 401(k). Your Roth IRA contribution, while interesting, does not bear on the subject at hand.

Your limit was $17K for employee contributions unless you were eligible for catch up.

You and your employer together could have contributed $50K. Clear?
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby LadyGeek » Mon Dec 31, 2012 11:57 am

Skyler wrote:That's about it, which adds up to $31,752.28. Does this mean I could have contributed another $18,247.72? Is it too late to do that?

As dickenjb says, your limits are defined by your employer plans (and the Roth IRA). The idea is that there are more ways to compensate employees than you can shake a stick at. Here's a small sampler: Employer Retirement Plans Overview

That IRS paragraph is throwing a wide net. So, if you're getting compensated in a few different ways, this is a way to make sure that the IRS has everything covered. If the limit is exceeded, you need to take care of it - hence the reason for this thread.
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby Alan S. » Mon Dec 31, 2012 12:55 pm

The Wizard wrote:I'm in a 403(b) plan, not a 401(k).
The trick to getting close to the $50K annual contribution on these plans has to do with the employer having mandatory contributions to start with. Mine REQUIRES me to contribute 5% of my salary and they kick in 10% above & beyond.
Additionally, I can OPTIONALLY contribute up to $23,000 more per year being that I'm really old.

Perhaps 401(k) plans have similar rules...


A 403b plan has two additional deferral features:
1) The typical catch up contribution after reaching 50 of 5,500. This contribution is NOT subject to the 50,000 annual additions limit.
2) The 15 years of service catchup option up to 3,000. This contribution is included in the annual additions limit of 50,000.

Therefore, your max total contributions is 55,500 for 2012 and 56,500 for 2013. Examples here:

http://www.irs.gov/Retirement-Plans/Pla ... ion-Limits

[broken link fixed by admin LadyGeek]
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby Skyler » Mon Dec 31, 2012 5:28 pm

LadyGeek wrote:
Skyler wrote:That's about it, which adds up to $31,752.28. Does this mean I could have contributed another $18,247.72? Is it too late to do that?

As dickenjb says, your limits are defined by your employer plans (and the Roth IRA). The idea is that there are more ways to compensate employees than you can shake a stick at. Here's a small sampler: Employer Retirement Plans Overview

That IRS paragraph is throwing a wide net. So, if you're getting compensated in a few different ways, this is a way to make sure that the IRS has everything covered. If the limit is exceeded, you need to take care of it - hence the reason for this thread.

Thanks you dickenjb and ladygeek!
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby HopeToGolf » Mon Dec 31, 2012 11:00 pm

Bill M wrote:I've been exceeding the $50K limit (the "415(c)(1)(A) limit") every year for my 401k. Intentionally. My company allows 50% of pay to be contributed. Contributions are automatically switched from before-tax (or Roth) to after-tax when I hit the $17K limit. But all of the contributions are invested for at least part of the year.

The company sends me a "corrective distribution" around April-May of the following year. It doesn't take any prodding or other action on my part. The distribution is calculated as (1) my total contributions, plus (2) company matching contributions, less (-3) the $50K maximum, plus (4) some interest on the amount from January 1. This amount is subtracted from the after-tax contributions to the plan, and income tax is due on the interest portion (4) in the year of the distribution.

As I see it, the excess contribution was in invested and generating earnings for most of year, and also for 4-5 months of the next year; the earnings get to stay in the savings plan. Call it a backdoor contribution to a tax-deferred account. So as long as the earnings exceed the (minimal) interest they pay on the excess, I make out.


Thanks Bill. Do you happen to know what your employer would do if the after-tax funds were not there to "subtract?" I'm in a similar place except I roll my after-tax into Roth via in-service withdrawals so effectively there is a point in time where my after-tax is small. We are talking small dollars here but it is possible my employer tries to make a corrective distribution of the excess and the only funds left in the account are pre-tax (the limit of which I never exceeded).
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby Alan S. » Mon Dec 31, 2012 11:49 pm

The plan will have it's own provisions for allocating the corrective distribution between the pre tax and after tax amounts of your contributions. Since your plan allows in service distributions of those after tax contributions, there is potential not to have enough left in the plan to meet the formula, and in that case they would have no choice but to return more pre tax amounts to make up the shortfall. The pre tax amount along with any allocated earnings would be taxable, but no penalty.

Note that Bill's plan is about as comprehensive as there is with automatic triggers. The earnings calculations should include the period between contribution dates and the end of the plan year, but not on earnings that accrue after the end of that year before the distribution is made.
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Re: Opps...Over 401K 50K Contribution Limits...what now?

Postby Bill M » Wed Jan 02, 2013 12:53 am

Thanks Bill. Do you happen to know what your employer would do if the after-tax funds were not there to "subtract?" I'm in a similar place except I roll my after-tax into Roth via in-service withdrawals so effectively there is a point in time where my after-tax is small. We are talking small dollars here but it is possible my employer tries to make a corrective distribution of the excess and the only funds left in the account are pre-tax (the limit of which I never exceeded).

I ran into a similar situation this year in doing a Roth conversion, and asked both my employer and plan administrator that question. They don't know what they would do in that case. When I pushed harder for an answer, I was told it had never happened before, and they have no idea what they would do. What they did say was to expect to file a 1040X when they figure it out.
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