Fixing excessive deferrals / overcontribution to 401k 403b

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Topic Author
moolman
Posts: 125
Joined: Sat Jan 30, 2010 4:50 pm

Fixing excessive deferrals / overcontribution to 401k 403b

Post by moolman »

Hi folks,
Thought I would post here how last year I fixed the excessive deferral to my 401k. And this year being the genius again, I did it again and over contributed. I did switch jobs twice and the new job made me use a percentage instead of an amount and there was a bonus at the end of the year I wasn't expecting.

Please correct me if I did this wrong last year or doing it wrong this year.

So 2 years ago 2012, I contributed about $500 too much to my 401k from 2 different employers, it was greater than $17,000 allowed in 2012. So I asked them to return the extra money and I got a check from them for the excess and earnings. I searched all over the internet and some said to just add it to line 7 of the 1040 or add it back to your W2 box 1. The problem with this is that you don't explain how it got there and why box 1 of your W2 is different than what was reported to the IRS. This will raise red flags for having different values in your W2 or if you just add more to line 7 of the 1040.

What I did for 2012, I use TaxAct. I made a "fake" 1099-R and in box 1 and 2 I put in the amount that I over contributed by. In box 7, I put contribution code 8. You would need to find the Payer's Fed ID and address, I just called them and asked. So this puts the over contribution into line 7 and I correctly paid taxes on it in 2012. Done. This was for 2012 that I filed in April 2013. So now in 2014 I got two 1099-Rs, one for the amount that I over contributed by, box 7 has contribution code P in it, which is correct because if it had 8, I would have to pay taxes on it again. I paid taxes on it correctly last year. The second 1099-R was for the earnings, which I pay taxes in 2013, that has box 7 listed with a contribution code 8, so I pay taxes in 2013.

Sound good to everyone?

Again, in 2013 I over contributed to my 401k again, crap, so once again I will be doing the above. Make a fake 1099-R with box 7, contribution code 8. I essentially have two 1099-Rs with box 7, contribution code 8, since the earnings from last time and the excessive deferral in 2013.

This is long but if you read through this, did I do this right or am I waiting for my audit letter.
Alan S.
Posts: 12669
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Fixing excessive deferrals / overcontribution to 401k 40

Post by Alan S. »

2012 appears correct. Your 1099Rs for the 2012 excess indicate that you received the corrective distribution between 1/1 and 4/15/2013.

For 2013, repeat the process. Order the corrective distribution ASAP so the plan can get the distribution done before 4/15/2014 and then the 1099R pattern will exactly follow what you did for 2012.
Topic Author
moolman
Posts: 125
Joined: Sat Jan 30, 2010 4:50 pm

Re: Fixing excessive deferrals / overcontribution to 401k 40

Post by moolman »

Yes, the corrections and return of excessive money was done before 4/15.

I hope this helps others in the same situation. I saw these instructions in a old post, along with other kinds of instructions, like the changing the w2 amount or just adding the extra into line 7. But after research, the "fake" 1099-R makes the most sense and I think it's the correct way to report it. Unfortunately, google searches turn up all kinds of advice.
Topic Author
moolman
Posts: 125
Joined: Sat Jan 30, 2010 4:50 pm

Re: Fixing excessive deferrals / overcontribution to 401k 40

Post by moolman »

Instruction found in TaxAct to do this, these instructions were not there last year. Glad they updated it.


Corrective distributions apply to pensions, and may be distributions of excess deferrals, excess contributions or excess aggregate contributions. For information on distributions of excess contributions plus earnings from traditional and Roth IRAs, see the Learn More topic Return of Excess IRA Contributions.

If you receive a corrective distribution, it means you contributed too much to your pension plan for the year and the plan administrator is returning the excess contributions to you, along with the earnings that were generated by the excess contributions while they were in the plan. The excess plus earnings must be included in your taxable income. The problem you may run into, is that even though you receive the funds early in 2014, you may not receive the Form(s) 1099-R, reporting the income until early 2015. If you wait until then to report the income, you will probably have to file an amended return for 2013.

If the excess and the earnings are taxable in two different years, you should receive two Forms 1099-R to designate the year each is taxable. The trustee must advise you at the time of the distribution of the year(s) in which the distribution is taxable and that it may be necessary to file an amended return for a prior tax year. To avoid having to file an amended return, you can enter the data now, on your 2013 return. Follow these instructions if your plan administrator distributes the excess plus earnings to you before the due date of April 15 for excess deferrals and March 15 for excess contributions and excess aggregate contributions. The rules are different for distributions made after these dates. See the instructions for Form 1099-R for more information.

Find out from the plan administrator how much of the balance was returned contributions and how much was earnings or (loss). Also determine the year in which each must be reported for tax purposes. Generally the excess is taxable in the year the excess was created (2013). In the case of excess contributions or excess aggregate contributions, the earnings are taxed in (2013). In the case of excess deferrals the earnings are taxable in the year received (2014).

If you determine the income should be include in your 2013 return, and you don't have a 1099-R, here is how to enter the data you received from the plan administrator in your 2013 tax return. Click Federal Q&A and move your cursor down to the Retirement Plan Income topic, then choose the IRA, 401(k), and Pension Plan Distributions (Form 1099-R) subtopic and click to begin. Create a new 1099-R in TaxACT. Enter the taxable amount in boxes 1 and 2a, and enter Code 8 in box 7. This will take the taxable amount to line 7 of the 1040 as wages, based on the instructions for Form 1040/1040NR. If the distribution involves a loss, see the Learn More topic Pension Plan Losses.

If you determine the income should be include in your 2013 return, and you have a (2014) 1099-R, use these instructions to enter the data in TaxACT. Create a new 1099-R in TaxACT as outlined above. Enter the data from your 2014 1099-R, including the Code P in box 7. Then, watch for a question asking you to check one of three boxes if these entries are from a (2014) Form 1099-R. Check the 'corrective distribution from a pension' box here. This will take the taxable amount to line 7 of the 1040 as wages, based on the instructions for Form 1040. If the distribution involves a loss, see the Learn More topic Pension Plan Losses.

You will end up with the returned excess included as income on your 2013 tax return, and the earnings included as income on your 2013 or 2014 tax return, depending on the type of corrective distribution you received. If you don't receive your 1099-R(s) until 2015, just place each copy with the appropriate year's tax records. Income reported on your 2013 return should not be reported again on your 2014 return.
User avatar
tfb
Posts: 8397
Joined: Mon Feb 19, 2007 4:46 pm

Re: Fixing excessive deferrals / overcontribution to 401k 40

Post by tfb »

moolman wrote:I did switch jobs twice and the new job made me use a percentage instead of an amount and there was a bonus at the end of the year I wasn't expecting.
All the employers I worked for allowed a new employee to give them a dollar maximum where the contribution should stop. It's not on the 401k/403b enrollment site/form. You send a separate message to payroll. Then if you contributed $5,000 while you were with a previous employer (look at last paycheck), you just tell the new employer to cut you off at $12,500. This way you don' get into over-contribution to begin with.
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Topic Author
moolman
Posts: 125
Joined: Sat Jan 30, 2010 4:50 pm

Re: Fixing excessive deferrals / overcontribution to 401k 40

Post by moolman »

I actually asked about putting a cap on for me, so that I don't go over and was told by HR and the 401k admin that they never heard of that.
User avatar
tfb
Posts: 8397
Joined: Mon Feb 19, 2007 4:46 pm

Re: Fixing excessive deferrals / overcontribution to 401k 40

Post by tfb »

moolman wrote:I actually asked about putting a cap on for me, so that I don't go over and was told by HR and the 401k admin that they never heard of that.
Maybe next time ask payroll. 401k admin can't do it. They only send the % elections to payroll and get dollars payroll sends them. They don't know whether you are paid a bonus or had a raise. Only payroll can cut you off.
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