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"PSA". Not all software catches excess 401k/403b contributions

Posted: Mon May 03, 2021 1:08 pm
by neurosphere
PSA = "Public Service Announcement"

I have been reading many threads on BH and elsewhere regarding excess 401k/403b deferrals/contributions (wife had an excess after-tax 401k contribution for 2020) both to help prepare my 2020 taxes, as well as general education.

With regards to the normal (e.g. non after-tax) employee deferrals subject to the (for example) $19,500 limit, many of the threads contains some variant of "your tax software should catch" the excess deferral (from W2 data). And also that the software will "put that amount on line 1" (or whatever wages line for that tax year).

But at least with TaxAct, the software does not recognize any excess deferral across two employers NOR an excess deferral on one W2. For example, I can enter $60,000 with a code D or E (401k/403b deferrals) and pass all the alerts, and that excess does not appear anywhere.

In order for the excess to appear on the wages line, a dummy 1099-R with code "8" needs to be entered in the system. At that point, the amount in box 2a of the 1099 ("taxable amount") does indeed get added to wages.

Anyway, I just thought I'd make this post for reference for anyone who has excess contributions to report/correct.

Relatedly and disappointingly, many sources on the internet use the words deferral and contribution interchangeably with respect to the employee 401k/403b deferrals, even the TaxAct site for example. I'm guilty of the same. But IRS publications make a distinction between these two works.

Re: "PSA". Not all software catches excess 401k/403b contributions

Posted: Mon May 03, 2021 5:15 pm
by cjk164
I had this same complaint and filed a feature request with TaxAct but only received back some worthless canned response. I will be moving away from TaxAct next year as there rates are no longer competitive and there software has not been intuitive when it comes to more complex returns.