How to deal with 401k over-contribution (leaving excess in plan?)

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

How to deal with 401k over-contribution (leaving excess in plan?)

Post by CoastalWinds »

Due to having 2 employers this year and not properly accounting for elective 401k deferrals at each, in total, my DH accidentally went over the 19K annual limit (12K at former employer plus 10K at current employer).

My questions are:

1. How do we go about “undoing” the excess?

2. The current employer matched contribution at 5%. If we “undo” the excess contribution, is the match also taken away?

Thank you
Last edited by CoastalWinds on Sat Oct 26, 2019 11:59 am, edited 7 times in total.
oldbie
Posts: 20
Joined: Sun Jun 23, 2019 1:09 pm

Re: How to deal with 401k over-contribution

Post by oldbie »

Yeah. I had a similar situation.

Call your current 401k provider and they will refund the excess contribution and deduct the employer match. My provider did not withhold any tax on the refunded amount so that is something you might have to account for yourself.
lakpr
Posts: 11612
Joined: Fri Mar 18, 2011 9:59 am

Re: How to deal with 401k over-contribution

Post by lakpr »

I had a similar situation 4 years ago when I switched jobs, although it wasn’t $5k more; it was more like $600 over.

Your alternatives are to contact your current employer and ask for return if all your 401k over contributions for this year to the extent they exceeded the $19k limit (this option has the drawback of the employer also clawing back the employer match based on such contributions), OR when you file taxes next year, declare this excess contribution as extra income and pay taxes on it. IF you leave the money within the 401k plan beyond April 15th if next year, you will never be able to get your over-contributions out.

From the advice I received on this forum, the best bet for you would be to pretend as if nothing happened, and bite the double tax on the over contribution (it is taxed on the way in, and will be taxed again on the way out). At least in my case, if I had asked for the contribution to be returned, I would also have list the employer match.

The employer match is 4.5% contribution if salary on a 6% contribution from my salary, do effectively a 75% return on the money. Even when I had been taxed 28% on the way in, and will likely be taxed 25% when I withdraw years into the future, the cumulative tax bite would be “only” 53%, I still win by 22%.
User avatar
Kagord
Posts: 1676
Joined: Fri Nov 23, 2018 12:28 pm
Location: Peaksville, Ohio

Re: How to deal with 401k over-contribution

Post by Kagord »

lakpr summarizes the options pretty well. Certainly this forum can't answer the match handling. And I doubt your HR dept would be able to actually answer in advance how taking back out affects the match (maybe it's determined by the "magical" HR/Payroll software interface programming). If your over the match amount minimum in contributions, there's no harm in asking though to get the HR department scrambling to answer, and then you can decide what's best for you on the answer you receive.

Also, on my 401K, the employer match is prorated over the year based on start date, I.E. you don't get a 3% match if you start 12/15 and fully contribute, you would get 1/24 of 3% for the match. Just pointing this out, you can ask about this as well, or compute it from your pay stub.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: How to deal with 401k over-contribution

Post by Spirit Rider »

The forfeiture of any match on returned excess deferrals is not a plan option. It is a mandatory IRS regulation.

As @lakpr recommended, it is best to only remove any excess deferrals that were not matched. The match/deferral will typically more than offset the double taxation.

Generally, a plan will not remove excess deferrals until W-2s for the year are received from both employers.
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

Re: How to deal with 401k over-contribution

Post by CoastalWinds »

lakpr wrote: Wed Sep 04, 2019 8:53 am I had a similar situation 4 years ago when I switched jobs, although it wasn’t $5k more; it was more like $600 over.

Your alternatives are to contact your current employer and ask for return if all your 401k over contributions for this year to the extent they exceeded the $19k limit (this option has the drawback of the employer also clawing back the employer match based on such contributions), OR when you file taxes next year, declare this excess contribution as extra income and pay taxes on it. IF you leave the money within the 401k plan beyond April 15th if next year, you will never be able to get your over-contributions out.

From the advice I received on this forum, the best bet for you would be to pretend as if nothing happened, and bite the double tax on the over contribution (it is taxed on the way in, and will be taxed again on the way out). At least in my case, if I had asked for the contribution to be returned, I would also have list the employer match.

The employer match is 4.5% contribution if salary on a 6% contribution from my salary, do effectively a 75% return on the money. Even when I had been taxed 28% on the way in, and will likely be taxed 25% when I withdraw years into the future, the cumulative tax bite would be “only” 53%, I still win by 22%.
Thank you. I will have to look into the details of the match some more, but I believe this double-taxation route might make sense. Could you share with me - what tax form/line is this excess contribution handled? Is it just income tax that is due, or are there other taxes and/or penalties on the excess of the 19k?

Thank you!
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

Re: How to deal with 401k over-contribution

Post by CoastalWinds »

Spirit Rider wrote: Wed Sep 04, 2019 9:50 am The forfeiture of any match on returned excess deferrals is not a plan option. It is a mandatory IRS regulation.

As @lakpr recommended, it is best to only remove any excess deferrals that were not matched. The match/deferral will typically more than offset the double taxation.

Generally, a plan will not remove excess deferrals until W-2s for the year are received from both employers.
Thank you. Just to make sure I understand...

If I elect to “do nothing” (ie, leave the excess in there), then I will reconcile the excess contribution when I file my taxes next year (effectively pay the fed income taxes on it), but will I for sure get to keep the match? I just checked and the match was 5% on 5% contributed, so all 100% of the excess was matched.
lakpr
Posts: 11612
Joined: Fri Mar 18, 2011 9:59 am

Re: How to deal with 401k over-contribution

Post by lakpr »

@CoastalWinds,

To answer your questions:
- Yes you will be able to keep all the employer match if you are willing to bite on the double taxation

- regarding taxes, when I filed taxes using TaxAct, when I added up the retirement plan deferrals from both employers, the software was intelligent enough to recognize that the sum exceeded the $18k limit, and added back the excess as Miscellaneous Income into the tax forms. On which, I paid the marginal tax along with my tax return.

IRS didn’t blink an eye, it has been 4 years since then with not any CP2000 notices on the subject.

Edited to add: as far as I remember, no penalties computed by the tax software
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

Re: How to deal with 401k over-contribution

Post by CoastalWinds »

lakpr wrote: Wed Sep 04, 2019 11:26 am @CoastalWinds,

To answer your questions:
- Yes you will be able to keep all the employer match if you are willing to bite on the double taxation

- regarding taxes, when I filed taxes using TaxAct, when I added up the retirement plan deferrals from both employers, the software was intelligent enough to recognize that the sum exceeded the $18k limit, and added back the excess as Miscellaneous Income into the tax forms. On which, I paid the marginal tax along with my tax return.

IRS didn’t blink an eye, it has been 4 years since then with not any CP2000 notices on the subject.

Edited to add: as far as I remember, no penalties computed by the tax software
I’m trying to brush up on the tax code, as a quick google search mentioned a 6% penalty.

So is neither employer or their plan ever involved in this process if I just leave the excess in place?? Does it only involve me and get resolved with my tax filing the next year?

Reason I ask is because, in reading up on IRC, if this involved just one employer then they would be required to distribute the excess to avoid disqualification of the 401k plan. So this option of “leave it in there” isnt even an option (at least it’s not mentioned in the IRC). Since this involves 2 different employers and plans, and each plan individually was compliant, is this what allows for this option, and does it only involve me without either employer/plan being scrutinized?
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: How to deal with 401k over-contribution

Post by Spirit Rider »

Any tax filing and taxation for 2019 only occurs on excess deferrals removed by 4/15/2020. After 4/15 any excess deferrals are subject to the same distribution restrictions and taxation. IRS regulations prohibit non-hardship in-service withdrawals/rollovers of employee deferrals prior to age 59 1/2. Upon distribution, they are subject to the same taxation as any legitimate employee deferral.
lakpr
Posts: 11612
Joined: Fri Mar 18, 2011 9:59 am

Re: How to deal with 401k over-contribution

Post by lakpr »

According to the IRS link below ( I googled the phrase “excess 401k deferral” ), the only consequence is double taxation. No penalty of 6% is mentioned anywhere in that link

https://www.irs.gov/retirement-plans/co ... -401k-plan

It only cautions that the excess deferral is NOT available as a basis for you at the time of withdrawal, when such withdrawal is “otherwise permissible” ( I interpret it to mean situations such as when you attain the age of 59.5, retire from that particular employer AND older than 55, use Rule 72t, etc.)

Read up on the “Example” given in the link, applies directly to situations such as yours (and mine)
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

Re: How to deal with 401k over-contribution

Post by CoastalWinds »

lakpr wrote: Wed Sep 04, 2019 12:17 pm According to the IRS link below ( I googled the phrase “excess 401k deferral” ), the only consequence is double taxation. No penalty of 6% is mentioned anywhere in that link

https://www.irs.gov/retirement-plans/co ... -401k-plan

It only cautions that the excess deferral is NOT available as a basis for you at the time of withdrawal, when such withdrawal is “otherwise permissible” ( I interpret it to mean situations such as when you attain the age of 59.5, retire from that particular employer AND older than 55, use Rule 72t, etc.)

Read up on the “Example” given in the link, applies directly to situations such as yours (and mine)
Thanks. This is the part that worries me:

“To the extent that a corrective distribution is not made within the correction period, the excess deferrals may not be distributed until a distribution is otherwise permissible under the terms of the plan, or the distribution is necessary to avoid plan disqualification under IRC Section 401(a)(30). Reg. Section 1.402(g)-1(e)(8)(iii) provides that distributions of excess deferrals after the correction period may be distributed from a 401(k) plan only when permitted under IRC Section 401(k)(2)(B).”

I do not want either employer or their respective 401k plans to get scrutinized or disqualified. It seems like this is a risk if I don’t get the excess removed?
lakpr
Posts: 11612
Joined: Fri Mar 18, 2011 9:59 am

Re: How to deal with 401k over-contribution

Post by lakpr »

I do not think either plan is going to be penalized, as you will not have deferred in excess of the plan limits at either plan. At neither plan you deferred in excess of $19k, did you? Plus neither plan will be concerned with what happens at the other employer’s plan.

I still repeat my advice to “do nothing” and accept the double tax bite. Easiest and safest option.
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

Re: How to deal with 401k over-contribution

Post by CoastalWinds »

Spirit Rider wrote: Wed Sep 04, 2019 9:50 am Generally, a plan will not remove excess deferrals until W-2s for the year are received from both employers.
How would Employer B even know about how much was contributed at Employer A? Why/how would Employer B (or their plan) ever receive a W-2 from Employer A?
Last edited by CoastalWinds on Wed Sep 04, 2019 1:18 pm, edited 1 time in total.
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

Re: How to deal with 401k over-contribution

Post by CoastalWinds »

lakpr wrote: Wed Sep 04, 2019 1:06 pm I do not think either plan is going to be penalized, as you will not have deferred in excess of the plan limits at either plan. At neither plan you deferred in excess of $19k, did you? Plus neither plan will be concerned with what happens at the other employer’s plan.

I still repeat my advice to “do nothing” and accept the double tax bite. Easiest and safest option.
You are correct that I did not defer more than 19K for either plan individually. But do I have some sort of responsibility to coordinate / inform the two employers’ respective plan administrators, to deal with the excess?
lakpr
Posts: 11612
Joined: Fri Mar 18, 2011 9:59 am

Re: How to deal with 401k over-contribution

Post by lakpr »

CoastalWinds wrote: Wed Sep 04, 2019 1:17 pm You are correct that I did not defer more than 19K for either plan individually. But do I have some sort of responsibility to coordinate / inform the two employers’ respective plan administrators, to deal with the excess?
The IRS link only asks that the participant takes steps to remove excess deferral out of either plan by 4/15 of next year, and outlines what the consequences would be. It is silent on whether there is an obligation in your part to inform either/or employer.

Given that it is to your advantage to simply stay put, even with the consequence that your excess deferral is going to be taxed twice, stay put and accept the consequence. No need to go above and beyond what the law says or guidelines offer. Obey the law, but no more.
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

Re: How to deal with 401k over-contribution

Post by CoastalWinds »

lakpr wrote: Wed Sep 04, 2019 1:23 pm
CoastalWinds wrote: Wed Sep 04, 2019 1:17 pm You are correct that I did not defer more than 19K for either plan individually. But do I have some sort of responsibility to coordinate / inform the two employers’ respective plan administrators, to deal with the excess?
The IRS link only asks that the participant takes steps to remove excess deferral out of either plan by 4/15 of next year, and outlines what the consequences would be. It is silent on whether there is an obligation in your part to inform either/or employer.

Given that it is to your advantage to simply stay put, even with the consequence that your excess deferral is going to be taxed twice, stay put and accept the consequence. No need to go above and beyond what the law says or guidelines offer. Obey the law, but no more.
Could I ask: what line on the 1040 did TaxAct add in your excess as “Additional Income”? And did you add any sort of note (or code) explaining what this amount was for (to help the IRS connect-the-dots between the excess contributed per your W-2s and this “additional income “ amount, so they know you paid the tax )? I’d really like to avoid any scrutiny or flags from the IRS.
Last edited by CoastalWinds on Wed Sep 04, 2019 1:36 pm, edited 1 time in total.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: How to deal with 401k over-contribution

Post by Spirit Rider »

CoastalWinds wrote: Wed Sep 04, 2019 12:38 pm Thanks. This is the part that worries me:

“To the extent that a corrective distribution is not made within the correction period, the excess deferrals may not be distributed until a distribution is otherwise permissible under the terms of the plan, or the distribution is necessary to avoid plan disqualification under IRC Section 401(a)(30). Reg. Section 1.402(g)-1(e)(8)(iii) provides that distributions of excess deferrals after the correction period may be distributed from a 401(k) plan only when permitted under IRC Section 401(k)(2)(B).”

I do not want either employer or their respective 401k plans to get scrutinized or disqualified. It seems like this is a risk if I don’t get the excess removed?
The requirements on a Defined Contribution (DC) employer are:
  • If the excess deferral came from their plan. They are ONLY responsible for removing the excess deferrals and earnings.
  • If the employee made excess deferrals from two or more plans. They may but are not required to to remove the excess deferrals and earnings. Typically the employer where the excess deferral occurred will remove the excess deferral and earnings. However, many previous employers will not.
  • Regardless of the reason from above the two bullets above, the employer is required to file a 1099-R with the correct Box 7 codes. Tax software will properly handle the tax reporting and calculation for the W-2 Box 12 code entries for pre-tax deferrals and 1099-R entries.
  • There is no reason for the the employee to even tell the employer they are leaving excess deferrals in the plan. Even if they are told, there is nothing for them to do, because there is no requirement for the employer to do anything if excess deferrals are left in the plan. If you leave excess deferrals in the plan. However, the excess is calculated from the multiple Form W-2 Box 12 code entries for pre-tax deferrals. Tax software will properly handle this tax reporting and calculation for the W-2 Box 12 code entries for pre-tax deferrals.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: How to deal with 401k over-contribution

Post by Spirit Rider »

CoastalWinds wrote: Wed Sep 04, 2019 1:35 pm Could I ask: what line on the 1040 did TaxAct add in your excess as “Additional Income”? And did you add any sort of note (or code) explaining what this amount was for (to help the IRS connect-the-dots between the excess contributed per your W-2s and this “additional income “ amount, so they know you paid the tax )? I’d really like to avoid any scrutiny or flags from the IRS.
Excess pre-tax deferrals and earnings are reported on Form 1040, Schedule 1, Line 21, Other income. This is reported for the tax year of the excess deferral. I believe the instructions are to write excess deferrals/earnings on the available space on Line 21.
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

Re: How to deal with 401k over-contribution

Post by CoastalWinds »

Spirit Rider wrote: Wed Sep 04, 2019 1:36 pm [*]Regardless of the reason from above the two bullets above, the employer is required to file a 1099-R with the correct Box 7 codes. Tax software will properly handle the tax reporting and calculation for the W-2 Box 12 code entries for pre-tax deferrals and 1099-R entries.
I assume this part about being required to file a 1099-R only applies if an employer actually returns an excess?

If I/they just leave the excess in there, then they wouldn’t know it was even an excess (since they didn’t know of my deferrals at employer A). In which case, I just calculate the excess from my two W-2s and add this on my 1040 as “additional income”. Is there a code that I assign to this to make sure the IRS knows that I paid my tax on the excess?
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

Re: How to deal with 401k over-contribution

Post by CoastalWinds »

Spirit Rider wrote: Wed Sep 04, 2019 1:40 pm
CoastalWinds wrote: Wed Sep 04, 2019 1:35 pm Could I ask: what line on the 1040 did TaxAct add in your excess as “Additional Income”? And did you add any sort of note (or code) explaining what this amount was for (to help the IRS connect-the-dots between the excess contributed per your W-2s and this “additional income “ amount, so they know you paid the tax )? I’d really like to avoid any scrutiny or flags from the IRS.
Excess pre-tax deferrals and earnings are reported on Form 1040, Schedule 1, Line 21, Other income. This is reported for the tax year of the excess deferral. I believe the instructions are to write excess deferrals/earnings on the available space on Line 21.
Ok, I think I follow. But do I have to calculate and pay tax on the earnings too? Wouldn’t I just pay tax on the excess deferral amount, and then upon distribution (in retirement) I would pay tax on deferral plus earnings?

If I have to pay tax on earnings on the excess deferral for my 2019 return, how is this even calculated?
cherijoh
Posts: 6591
Joined: Tue Feb 20, 2007 3:49 pm
Location: Charlotte NC

Re: How to deal with 401k over-contribution

Post by cherijoh »

lakpr wrote: Wed Sep 04, 2019 12:17 pm According to the IRS link below ( I googled the phrase “excess 401k deferral” ), the only consequence is double taxation. No penalty of 6% is mentioned anywhere in that link

https://www.irs.gov/retirement-plans/co ... -401k-plan

It only cautions that the excess deferral is NOT available as a basis for you at the time of withdrawal, when such withdrawal is “otherwise permissible” ( I interpret it to mean situations such as when you attain the age of 59.5, retire from that particular employer AND older than 55, use Rule 72t, etc.)

Read up on the “Example” given in the link, applies directly to situations such as yours (and mine)
I think the 6% penalty is for excess IRA contributions, not workplace plans.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: How to deal with 401k over-contribution

Post by Spirit Rider »

CoastalWinds wrote: Wed Sep 04, 2019 1:51 pm Ok, I think I follow. But do I have to calculate and pay tax on the earnings too? Wouldn’t I just pay tax on the excess deferral amount, and then upon distribution (in retirement) I would pay tax on deferral plus earnings?

If I have to pay tax on earnings on the excess deferral for my 2019 return, how is this even calculated?
You only pay taxes on the earnings if you remove the excess deferrals and earnings. This will be reported on the Form 1099-R.

Regardless of whether you remove the excess deferrals or not, Excess pre-tax deferrals are subject to ordinary income tax. That amount is calculated from the W-2 Box 12 entries for pre-tax deferrals.

You should really let tax software handle this.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: How to deal with 401k over-contribution

Post by Spirit Rider »

CoastalWinds wrote: Wed Sep 04, 2019 1:51 pm Ok, I think I follow. But do I have to calculate and pay tax on the earnings too? Wouldn’t I just pay tax on the excess deferral amount, and then upon distribution (in retirement) I would pay tax on deferral plus earnings?

If I have to pay tax on earnings on the excess deferral for my 2019 return, how is this even calculated?
You only pay taxes on the earnings if you remove the excess deferrals and earnings. This will be reported on the Form 1099-R.

Regardless of whether you remove the excess deferrals or not, Excess pre-tax deferrals are subject to ordinary income taxes. If a W-2 employee this is because your W-2 Box 1 wages were reduced by the pre-tax deferral. That amount is calculated from the W-2 Box 12 entries for pre-tax deferrals. If you are self-employed, you simply can not claim the Form 1040, Schedule 1, Line 28 deduction. In both cases this is why you are double-taxed.

You should really let tax software handle this.
MarkNYC
Posts: 2999
Joined: Mon May 05, 2008 7:58 pm

Re: How to deal with 401k over-contribution

Post by MarkNYC »

Spirit Rider wrote: Wed Sep 04, 2019 1:40 pm
CoastalWinds wrote: Wed Sep 04, 2019 1:35 pm Could I ask: what line on the 1040 did TaxAct add in your excess as “Additional Income”? And did you add any sort of note (or code) explaining what this amount was for (to help the IRS connect-the-dots between the excess contributed per your W-2s and this “additional income “ amount, so they know you paid the tax )? I’d really like to avoid any scrutiny or flags from the IRS.
Excess pre-tax deferrals and earnings are reported on Form 1040, Schedule 1, Line 21, Other income. This is reported for the tax year of the excess deferral. I believe the instructions are to write excess deferrals/earnings on the available space on Line 21.
That is not correct. Excess elective deferrals get reported on the "wages" line 1 of the 1040.
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

Re: How to deal with 401k over-contribution

Post by CoastalWinds »

MarkNYC wrote: Wed Sep 04, 2019 2:13 pm
Spirit Rider wrote: Wed Sep 04, 2019 1:40 pm
CoastalWinds wrote: Wed Sep 04, 2019 1:35 pm Could I ask: what line on the 1040 did TaxAct add in your excess as “Additional Income”? And did you add any sort of note (or code) explaining what this amount was for (to help the IRS connect-the-dots between the excess contributed per your W-2s and this “additional income “ amount, so they know you paid the tax )? I’d really like to avoid any scrutiny or flags from the IRS.
Excess pre-tax deferrals and earnings are reported on Form 1040, Schedule 1, Line 21, Other income. This is reported for the tax year of the excess deferral. I believe the instructions are to write excess deferrals/earnings on the available space on Line 21.
That is not correct. Excess elective deferrals get reported on the "wages" line 1 of the 1040.
Does the reporting line on the 1040 depend on whether the excess was left in place or returned? I am interested in the scenario where the excess is not returned (and hence neither a 1099-R or corrected W-2 is involved).
MarkNYC
Posts: 2999
Joined: Mon May 05, 2008 7:58 pm

Re: How to deal with 401k over-contribution

Post by MarkNYC »

CoastalWinds wrote: Wed Sep 04, 2019 2:37 pm
MarkNYC wrote: Wed Sep 04, 2019 2:13 pm
Spirit Rider wrote: Wed Sep 04, 2019 1:40 pm
CoastalWinds wrote: Wed Sep 04, 2019 1:35 pm Could I ask: what line on the 1040 did TaxAct add in your excess as “Additional Income”? And did you add any sort of note (or code) explaining what this amount was for (to help the IRS connect-the-dots between the excess contributed per your W-2s and this “additional income “ amount, so they know you paid the tax )? I’d really like to avoid any scrutiny or flags from the IRS.
Excess pre-tax deferrals and earnings are reported on Form 1040, Schedule 1, Line 21, Other income. This is reported for the tax year of the excess deferral. I believe the instructions are to write excess deferrals/earnings on the available space on Line 21.
That is not correct. Excess elective deferrals get reported on the "wages" line 1 of the 1040.
Does the reporting line on the 1040 depend on whether the excess was left in place or returned? I am interested in the scenario where the excess is not returned (and hence neither a 1099-R or corrected W-2 is involved).
The excess deferrals get reported on the wages line of the 1040 regardless of whether or not returned to the employee.
User avatar
Kagord
Posts: 1676
Joined: Fri Nov 23, 2018 12:28 pm
Location: Peaksville, Ohio

Re: How to deal with 401k over-contribution

Post by Kagord »

It's fairly simple and straightforward.

See IRC Sections 402(g)(1) and 402(g)(2) and Reg. Section 1.402(g)-1(e)(2).

Then see IRC Section 402(g)(2)(A)(ii), but take into account the finite details of Reg. Section 1.402(g)-1(e)(8)(iii)

Once you have a full understanding, do not discount the importance of (investigate with scrutiny) IRC Section 414(v).

After that, fill in form 27B/6 (Form 27B, Stroke 6), and Bob's your uncle.
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

Re: How to deal with 401k over-contribution

Post by CoastalWinds »

MarkNYC wrote: Wed Sep 04, 2019 3:03 pm
CoastalWinds wrote: Wed Sep 04, 2019 2:37 pm
MarkNYC wrote: Wed Sep 04, 2019 2:13 pm
Spirit Rider wrote: Wed Sep 04, 2019 1:40 pm
CoastalWinds wrote: Wed Sep 04, 2019 1:35 pm Could I ask: what line on the 1040 did TaxAct add in your excess as “Additional Income”? And did you add any sort of note (or code) explaining what this amount was for (to help the IRS connect-the-dots between the excess contributed per your W-2s and this “additional income “ amount, so they know you paid the tax )? I’d really like to avoid any scrutiny or flags from the IRS.
Excess pre-tax deferrals and earnings are reported on Form 1040, Schedule 1, Line 21, Other income. This is reported for the tax year of the excess deferral. I believe the instructions are to write excess deferrals/earnings on the available space on Line 21.
That is not correct. Excess elective deferrals get reported on the "wages" line 1 of the 1040.
Does the reporting line on the 1040 depend on whether the excess was left in place or returned? I am interested in the scenario where the excess is not returned (and hence neither a 1099-R or corrected W-2 is involved).
The excess deferrals get reported on the wages line of the 1040 regardless of whether or not returned to the employee.
Is this where tax software would put it? I’m confused why TaxAct software didn’t do this in lakpr’s case (see above).

Should I write in “excess 401k deferral” on line 1 too?
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

Re: How to deal with 401k over-contribution (need tax expertise)

Post by Spirit Rider »

My mistake, I know better than that. For W-2 employees the excess deferrals are reported as wages. Now that my confidence is suspect, I'm not 100% sure about the earnings.

As I stated in a previous post:

"You only pay taxes on the earnings if you remove the excess deferrals and earnings. This will be reported on the Form 1099-R."
MarkNYC
Posts: 2999
Joined: Mon May 05, 2008 7:58 pm

Re: How to deal with 401k over-contribution

Post by MarkNYC »

CoastalWinds wrote: Wed Sep 04, 2019 3:11 pm
MarkNYC wrote: Wed Sep 04, 2019 3:03 pm
CoastalWinds wrote: Wed Sep 04, 2019 2:37 pm
MarkNYC wrote: Wed Sep 04, 2019 2:13 pm
Spirit Rider wrote: Wed Sep 04, 2019 1:40 pm
Excess pre-tax deferrals and earnings are reported on Form 1040, Schedule 1, Line 21, Other income. This is reported for the tax year of the excess deferral. I believe the instructions are to write excess deferrals/earnings on the available space on Line 21.
That is not correct. Excess elective deferrals get reported on the "wages" line 1 of the 1040.
Does the reporting line on the 1040 depend on whether the excess was left in place or returned? I am interested in the scenario where the excess is not returned (and hence neither a 1099-R or corrected W-2 is involved).
The excess deferrals get reported on the wages line of the 1040 regardless of whether or not returned to the employee.
Is this where tax software would put it? I’m confused why TaxAct software didn’t do this in lakpr’s case (see above).

Should I write in “excess 401k deferral” on line 1 too?
Please read the IRS instructions for line 1 (wages) of Form 1040, specifically the section on excess elective deferrals. You should write a description if the instructions request it.

I can't answer your tax software questions.
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

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

Post by CoastalWinds »

Is any of this affected by the fact that $4K of the excess was a Roth 401k elective contribution? Would that change the numbers or strategy at all?
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

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

Post by Spirit Rider »

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.
User avatar
LadyGeek
Site Admin
Posts: 95691
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

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

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (401(k) excess contribution).
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

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

Post by CoastalWinds »

Spirit Rider wrote: Wed Sep 04, 2019 6:52 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.
I agree that they weren’t pre-tax, but doesn’t this mean that they were already treated as taxable wages (and included in box 1 of W-2).

Why would they be taxed on withdrawal? I would have already paid tax on them TWICE - once to contribute, and once as part of the Excess contribution reporting requirement.
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

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

Post by Spirit Rider »

CoastalWinds wrote: Wed Sep 04, 2019 9:38 pm
Spirit Rider wrote: Wed Sep 04, 2019 6:52 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.
I agree that they weren’t pre-tax, but doesn’t this mean that they were already treated as taxable wages (and included in box 1 of W-2).
That is exactly what I said.
Why would they be taxed on withdrawal? I would have already paid tax on them TWICE - once to contribute, and once as part of the Excess contribution reporting requirement.
As I already stated, there is no excess deferral reporting and taxes on excess designated Roth contributions. They were only taxed ONCE as part of your W-2 Box 1 wages.
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

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

Post by CoastalWinds »

Do we have any say in which excess contributions to remove, so as to avoid the loss of the match? The prior plan matched 100% of the first 5%. Some of the elective deferrals were at 10%, while some were at 5%. So we would like to have some of the excess from the 10% contributions returned ... but does anyone know if we can specify the exact contribution lots to be returned, or does the company get to pick whatever Contribution it wants to return?
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

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

Post by Spirit Rider »

While employer matches may be tied on a payroll basis. There is no such thing as contribution lots.

If you want to leave 5% in the plan, request removal of the contributions > that amount and their associated earnings.
Topic Author
CoastalWinds
Posts: 1063
Joined: Sat Apr 06, 2019 8:28 pm

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

Post by CoastalWinds »

Spirit Rider wrote: Sat Oct 26, 2019 2:47 pm While employer matches may be tied on a payroll basis. There is no such thing as contribution lots.

If you want to leave 5% in the plan, request removal of the contributions > that amount and their associated earnings.
It’s not a “true-up” plan, so then wouldn’t there be a risk of losing part of the match depending on what they decide to distribute? How should I word it to avoid this?
Spirit Rider
Posts: 13977
Joined: Fri Mar 02, 2007 1:39 pm

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

Post by Spirit Rider »

Usually, plans will only remove excess contributions and earnings after the end of the year. Often only after your Form W-2 is issued.
ccompounder
Posts: 47
Joined: Sun Oct 11, 2020 2:30 pm

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

Post by ccompounder »

Spirit Rider wrote: Wed Sep 04, 2019 10:50 pm
CoastalWinds wrote: Wed Sep 04, 2019 9:38 pm
Spirit Rider wrote: Wed Sep 04, 2019 6:52 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.
I agree that they weren’t pre-tax, but doesn’t this mean that they were already treated as taxable wages (and included in box 1 of W-2).
That is exactly what I said.
Why would they be taxed on withdrawal? I would have already paid tax on them TWICE - once to contribute, and once as part of the Excess contribution reporting requirement.
As I already stated, there is no excess deferral reporting and taxes on excess designated Roth contributions. They were only taxed ONCE as part of your W-2 Box 1 wages.
Isn't this some sort of new ROTH backdoor that you can use when you switch employer?
Assuming the following:

Using 2021 numbers:
While at employer A: Contribute to the max of $19,500 to 401(k).
While at employer B: Contribute to the max of $19,500 to ROTH 401(k).

Do not contact any employer about excess deferral: "There is no excess deferral reporting and taxes on excess designated Roth contributions". In other words, we have just created another ROTH contribution space per employer, per taxable year.
Post Reply