Excess aftertax 401K $ returned: What to expect nx year?

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Excess aftertax 401K $ returned: What to expect nx year?

Postby runnergirl » Wed Apr 03, 2013 9:20 am

I wrote in a couple of weeks ago regarding an accidental overcontribution to the after-tax 401K portion of my $51,000 limit. Although the limit had not been reached yet, the amount contributed to the AT portion would have prevented me from filling up my pre-tax $17,500 space and my employer match space. The company has returned to me the portion of over-contribution by direct deposit to my checking account. Last time I spoke with them, they said they were still looking into the matter and then surprised me with the refund in my checking account. What sort of form should I expect at tax time next year? A 1099-R? Nothing because the mistake was corrected in a matter of weeks?
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Re: Excess aftertax 401K $ returned: What to expect nx year

Postby gtaylor » Wed Apr 03, 2013 10:16 am

This happens to me every year because the math is apparently unpossible. Something about the employer match top-up confounds the payroll computer.

In my case the corrective distribution occurs the year after, and I do get a 1099-R the year after that, for the year of the distribution. So for example my April 2013 tax filing references a 2012 1099-R received in Feb 2013 for a Dec 2012 corrective distribution that was made to correct a 2011 annual limit overage.

In your case, the corrective distribution occurs in the contribution year. IIRC this sort of correction does not get a 1099-R, or if it does it has no tax impact, and regardless your W-2 and tax filings should reflect the fact that the whole year's contributions are correct.

[ The third case, which after-tax distributions mercifully avoid, is that a corrective distribution for a prior year returns certain pretax amounts. I these cases you can get two 1099-R's, one for the contribution year and one for the distribution year with the earnings. Awkwardly these 1099-Rs both arrive the year after, so you have to file a 1040X for the contribution year as well as tax the income in the distribution year. ]

Your payroll types sound pretty prompt compared to mine, I'm always reporting peculiar retirement account events on my taxes that have to do with transactions three calendar years ago. Kind of a pain.
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Re: Excess aftertax 401K $ returned: What to expect nx year

Postby runnergirl » Wed Apr 03, 2013 12:30 pm

Thanks gtaylor. Interesting, I assume I have to pay taxes on any gains, if any, while in the 401-K? Where will that be reported?
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Re: Excess aftertax 401K $ returned: What to expect nx year

Postby runnergirl » Mon Apr 08, 2013 4:14 pm

Bump.
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Re: Excess aftertax 401K $ returned: What to expect nx year

Postby Alan S. » Mon Apr 08, 2013 5:35 pm

If you get a 1099R (maybe you won't), you will have to report it on lines 16a and 16b. If your distribution included a small amount of earnings, the earnings would go on 16b and there would be a 10% penalty on the earnings ONLY if the 1099R was not coded as a corrective distribution.
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Re: Excess aftertax 401K $ returned: What to expect nx year

Postby gtaylor » Tue Apr 09, 2013 2:42 pm

Alan S. wrote:If you get a 1099R (maybe you won't), you will have to report it on lines 16a and 16b. If your distribution included a small amount of earnings, the earnings would go on 16b and there would be a 10% penalty on the earnings ONLY if the 1099R was not coded as a corrective distribution.


Ah, yes, exactly, the small taxable amount shows up there on 16b.

In my case, the corrective distributions include earnings and there is also withholding done on them. So this year, for example, I had $4 in withholding covering the taxes on some trivial amount of earnings. The withholding shows up later in the 1040 where the tax due is computed. I don't think there will be a penalty on these sorts of corrective distributions.

Note that a 1099-R which includes withholding is apparently supposed to be included with your tax filing, like a W-2 is.
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Re: Excess aftertax 401K $ returned: What to expect nx year

Postby Alan S. » Tue Apr 09, 2013 7:51 pm

What is the box 7 coding on that 1099R?
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Re: Excess aftertax 401K $ returned: What to expect nx year

Postby Bill M » Wed Apr 10, 2013 12:50 am

I exceed the after-tax limit every year; there is just no way to make sure I reach it without going over. Sometimes fairly significantly. Also some of the funds in MeagCo's 401k are better than I can get on my own, so I don't mind having investments in them for the year.

Every year in March I get a check back with the excess contributed during the previous year, and their calculation of earnings on that excess. I have no idea how they calculate the earnings on the excess, and wonder if anyone else knows. The following year I get a 1099-R showing that amount. So for my 2011 over-contribution, I get the check back in 2012, and a 1099-R in January 2013. Box 7 of the 1099-R shows Code E.
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Re: Excess aftertax 401K $ returned: What to expect nx year

Postby Bacchus01 » Tue Jul 02, 2013 1:27 am

Just curious as I posted something similar.

What happens if the "excess" is no longer in your account? What happens if you have already withdrawn the amount (if your plan allows this, mine does)? What happens if you've not only withdrawn it, but rolled it to a Roth IRA?
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Re: Excess aftertax 401K $ returned: What to expect nx year

Postby Alan S. » Tue Jul 02, 2013 2:39 pm

The plan should notify you, and the 1099R forms previously issued should be revised, or if not yet issued the 1099R will indicate a reduced amount for the direct rollover and the difference as a corrective distribution on a separate 1099R. That results in your Roth rollover including an excess Roth contribution which needs to be removed from the IRA along with allocated earnings. You will have to explain the reason for the IRA corrective distribution to the IRA custodian so your IRA 1099R is coded correctly. While the earnings accrued on the excess amount in the IRA will be taxable and subject to penalty, there is no penalty on the earnings distributed from the 401k plan as a result of the excess in that plan. When all is completed, the excess 401k amount will be back in your taxable accounts. The whole process is more complex if you happened to adopt an "isolation of basis" strategy under which only the after tax amount went to your Roth IRA and any earnings were rolled to your TIRA. Then you would have some excess in each IRA type to be corrected and a more complex tax filing.
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Re: Excess aftertax 401K $ returned: What to expect nx year

Postby Bacchus01 » Tue Jul 02, 2013 7:06 pm

Thanks for the response.

Have you actually seen this done?

And what if you didn't actually roll it over? What if you just took a withdrawl? How is that treated?

Say I had $55K total contribution, but withdrew $5K after-tax (all contribution, assume no earnings). How would that be handled?
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Re: Excess aftertax 401K $ returned: What to expect nx year

Postby mah001 » Tue Jul 02, 2013 8:48 pm

Exceeding the 415 limit often puts the employer in more jeopardy than the individual employee. If not properly corrected, the entire plan's qualified status is lost. This potentially results in a loss of the tax deferral/deduction benefits. Revenue Procedure 2013-12 is now the authority on correction of 415 problems. Bacchus, if you are the one who initiated the withdrawal the IRS might assert it wasn't a proper correction. Similarly RunnerGirl, the IRS might say it's not allowed to distribute an excess at a point in time when the limit hasn't been reached yet. The plan needs to have ways to reduce or avoid these situations.

Note section 415 limit is based on the plan's "limitation year," which might not be the calendar year.
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