Work error resulted in over contribution to 401K- what are the ramifications?

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Funletter2020
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Joined: Thu Jun 18, 2020 2:20 pm

Work error resulted in over contribution to 401K- what are the ramifications?

Post by Funletter2020 »

Hi, my work made an error and made an over deduction from my pay to my 2020 401K, resulting in me contributing more than the $19,500 limit. Payroll usually has systems in place to stop payroll deductions to retirement accounts when an employee has reached the limit, but this did not happen in this case.

I was told by the plan administrator that my job would have to fix this error before the end of the year in order to avoid some sort of consequences. After much back and forth with my work's accounting/payroll folks, I thought we had finally resolved the issue, and I was issued a check taking the $ out of the 401K for the over contribution amount before the new year.

However, I just noticed on my electronic pay stub of the check they issued that the same exact problem occurred again. Once again, the system did not register that I was already at my limit and so the very money they were reimbursing me (taken out of my 401K so that I would not contribute more than the limit), was placed right back into my 401K, meaning I'm back to square one and have over contributed to my 2020 401K.

I'm going to talk with my work's accounting folks again this week, but I'd like to know what are the consequences for having over contributed to my 401K (more than $19,500 in payroll deductions). I'd like to spell out to them what the issues are and ensure I get this resolved and any consequences reversed.

Thanks!
megabad
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Re: Work error resulted in over contribution to 401K- what are the ramifications?

Post by megabad »

If you have to explain to them why this is an issue, you have a really bad situation. You have a mess now, but it is a mess that a competent HR department should be able to fix. If what you are saying is true, you need to notify employer immediately and have them correct prior to April 15. The sooner you do this the better because you will may to have W2s corrected which will create an accounting nightmare for you and the IRS. If they do this properly, you will have an adjusted W2 for 2020 with the taxable contribution and the gains taxed in 2021 (when the distribution occurs). If not fixed by April 15, you would have the adjusted W2 for 2020 and then be taxed again on the total amount in 2021 (the "double taxation" that everyone talks about). Don't do this, fix it now.
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Crustus
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Re: Work error resulted in over contribution to 401K- what are the ramifications?

Post by Crustus »

If you were older than 50 in 2020 and your plan allows it, you can contribute up to $26,000 to your 401(k). Some plans do the 'catch up' contributing automatically.
And . . .
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Watty
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Re: Work error resulted in over contribution to 401K- what are the ramifications?

Post by Watty »

Funletter2020 wrote: Tue Jan 12, 2021 12:56 am I'm going to talk with my work's accounting folks again this week, but I'd like to know what are the consequences for having over contributed to my 401K (more than $19,500 in payroll deductions). I'd like to spell out to them what the issues are and ensure I get this resolved and any consequences reversed.
One of the consequences for them is that plan would fail an annual audit and cause the company management all sorts of pain. They have a lot of incentive to get it fixed since no one involved wants to stand in front of the CEO and board of directors to explain why the 401k plan failed the audit.

As long as you keep following up with it this will be fixed right since you caught it so early. There may be something going on like they have three people that need to review and sign off and approve any fix and those people may also be very busy with the normal year end accounting crunch. It will likely take some time so just be patient and keep asking them for updates every couple of weeks and document everything well.
ThisTimeItsDifferent
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Re: Work error resulted in over contribution to 401K- what are the ramifications?

Post by ThisTimeItsDifferent »

Due to switching jobs this year and my final paycheck being slightly higher than the usual amount, I over contributed to my 401k by <25$. Even though my previous and current employer both use Fidelity to administer their 401k plans, they were not able to stop the contributions at a total of the annual deferral limit. The return of excess contribution form requires a $25 processing fee. I plan to leave the over contribution in and get double taxed on that small amount whenever I withdraw later. I expect Turbo-Tax will handle it properly. Oh well.
megabad
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Re: Work error resulted in over contribution to 401K- what are the ramifications?

Post by megabad »

ThisTimeItsDifferent wrote: Wed Jan 13, 2021 12:09 pm Due to switching jobs this year and my final paycheck being slightly higher than the usual amount, I over contributed to my 401k by <25$. Even though my previous and current employer both use Fidelity to administer their 401k plans, they were not able to stop the contributions at a total of the annual deferral limit. The return of excess contribution form requires a $25 processing fee. I plan to leave the over contribution in and get double taxed on that small amount whenever I withdraw later. I expect Turbo-Tax will handle it properly. Oh well.
I don't envy the record keeping you are taking on. Can't imagine tracking the gains myself over very long time and portfolio changes. What a nightmare.
Katietsu
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Re: Work error resulted in over contribution to 401K- what are the ramifications?

Post by Katietsu »

ThisTimeItsDifferent wrote: Wed Jan 13, 2021 12:09 pm Due to switching jobs this year and my final paycheck being slightly higher than the usual amount, I over contributed to my 401k by <25$. Even though my previous and current employer both use Fidelity to administer their 401k plans, they were not able to stop the contributions at a total of the annual deferral limit. The return of excess contribution form requires a $25 processing fee. I plan to leave the over contribution in and get double taxed on that small amount whenever I withdraw later. I expect Turbo-Tax will handle it properly. Oh well.
I do not think this is a valid option. It is not just about being taxed twice, it is about having money in a plan that is absolutely not allowed there. Given it is only $25, I do not know the real world potential ramifications.

Did you definitely put more into tax deferred than allowed or did you just have $25 that is considered after tax?


This is above my head but I am sure SpiritRider or Alan S would have something to say.
Katietsu
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Re: Work error resulted in over contribution to 401K- what are the ramifications?

Post by Katietsu »

Crustus wrote: Tue Jan 12, 2021 4:45 pm If you were older than 50 in 2020 and your plan allows it, you can contribute up to $26,000 to your 401(k). Some plans do the 'catch up' contributing automatically.
OP stated they were in late 40’s in an earlier post.

OP- if you turned 50 at any time in 2020, even the last day of the year, the new limit applies. Does this explain why the payroll system is not stopping contributions?
ThisTimeItsDifferent
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Re: Work error resulted in over contribution to 401K- what are the ramifications?

Post by ThisTimeItsDifferent »

Katietsu wrote: Wed Jan 13, 2021 1:24 pm
ThisTimeItsDifferent wrote: Wed Jan 13, 2021 12:09 pm Due to switching jobs this year and my final paycheck being slightly higher than the usual amount, I over contributed [over deferred] to my 401k by <25$.

I plan to leave the over contribution [deferral] in and get double taxed on that small amount whenever I withdraw later. I expect Turbo-Tax will handle it properly. Oh well.
I do not think this is a valid option. It is not just about being taxed twice, it is about having money in a plan that is absolutely not allowed there. Given it is only $25, I do not know the real world potential ramifications.

Did you definitely put more into tax deferred than allowed or did you just have $25 that is considered after tax?

This is above my head but I am sure SpiritRider or Alan S would have something to say.
I put more in than the deferral limit+catch up, not more than the overall~$55k limit. My new plan did not support After-Tax contributions.

https://www.irs.gov/retirement-plans/pl ... ion-limits

Funny, the IRS site says
Excess withdrawn by April 15. If you exceed the deferral limit for 2020, you must distribute the excess deferrals by April 15, 2021.[bold mine]

but also says
Excess not withdrawn by April 15. If you don't take out the excess deferral by April 15, 2021, the excess, though taxable in 2020, is not included in your cost basis in figuring the taxable amount of any eventual distributions from the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan.[bold mine][also assume "may" means "might" not "is not permitted to"]
Since this was in two plans not one, I don't see how it can make either "not be a qualified plan" and I do not plan to keep track of basis so I am willing to have that <$25 excess deferral be taxed twice.

According to Spirit Rider, Alan S and other experts:

viewtopic.php?t=265609
Spirit Rider wrote: Fri Dec 07, 2018 8:03 pm
H-Town wrote: Fri Dec 07, 2018 7:30 pm Penalty for excess contribution is 6%.
The 6% excise tax on unremoved excess contributions does not apply to qualified plans.
i.e. it applies to IRAs and not to 401k plans.

and lots of discussion by those experts here indicating I should be able to leave the excess deferrals.
viewtopic.php?t=289710

I don't know whether the catch up is a separate bucket according to the IRS or just an increased deferral limit, and catch up is just tracked separately by employers. In my case I had a <$20 traditional over deferral and <$5 catch up Roth over deferral. Since I had both Roth and Traditional across the base and catch up amounts, maybe it does not matter.

Spirit Rider also noted
Re: How to deal with 401k over-contribution (leaving excess in plan?)

Unread post by Spirit Rider » Wed Sep 04, 2019 5:52 pm
The excess designated Roth contributions are not pre-tax and therefore not reported as taxable wages, because your W-2 Box 1 wages were not reduced by the designated Roth contributions.

While technically excess designated Roth contributions should be taxed on withdrawal, there is no mechanism to track this and report the distributions as taxable.
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Scott S
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Re: Work error resulted in over contribution to 401K- what are the ramifications?

Post by Scott S »

The plan at my work automatically turns the excess into after-tax contributions. I know because I've miscalculated a couple years. Maybe your plan administrator could consider turning on that option as an alternative to the hassle of reverting excess contributions?
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