excess contribution to 403b

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Topic Author
notmakingmoney
Posts: 25
Joined: Sat Mar 06, 2021 10:36 pm

excess contribution to 403b

Post by notmakingmoney »

Hi,

Due to several part-time jobs this past year, I messed up the calculations and ended up with 403b contributions that exceed 19.5k. I have requested the plan administrator to process the 'return of excess contribution'. BTW, they said they would return only the contributions, not the dividends or gains - I thought one had to return the earnings as well.

If they approve and return the excess, then should I add the excess amount to the wages? Is 1099-MISC the correct form to do so?

The IRS guide says that the excess amount should be withdrawn by April 15. Will this date be May 17 this year? If it will still be April 15, then since I would be late in withdrawing the amount, should I include a 6% penalty somewhere or will the IRS send a bill (or will they automatically add it to the tax)? And is it a one time penalty or assessed every year that the excess remains contributed (that doesn't sound correct but I thought I read it somewhere)?

Thanks,
John
Topic Author
notmakingmoney
Posts: 25
Joined: Sat Mar 06, 2021 10:36 pm

irs didn't catch excess contribution

Post by notmakingmoney »

[Thread merged into here --admin LadyGeek]

Hi,

I noticed quite late (after the Apr 15 deadline) that I had made excess contribution to my 403b. Since it was taking fidelity very long to process the excess contribution paperwork, I decided to file the taxes and let IRS determine the penalty, however, it seems that they processed the return without penalizing for the excess contribution. I believe the penalty is 6% per year the excess amount is left in the account, therefore, I thought I'd ask the folks here what should I do now. Should I continue working with fidelity and employer to return the excess contribution and file an amended tax return or should I leave it as it is.

Thanks for your help.
Monsterflockster
Posts: 980
Joined: Wed Nov 20, 2019 11:03 pm

Re: irs didn't catch excess contribution

Post by Monsterflockster »

notmakingmoney wrote: Wed May 26, 2021 6:52 pm Hi,

I noticed quite late (after the Apr 15 deadline) that I had made excess contribution to my 403b. Since it was taking fidelity very long to process the excess contribution paperwork, I decided to file the taxes and let IRS determine the penalty, however, it seems that they processed the return without penalizing for the excess contribution. I believe the penalty is 6% per year the excess amount is left in the account, therefore, I thought I'd ask the folks here what should I do now. Should I continue working with fidelity and employer to return the excess contribution and file an amended tax return or should I leave it as it is.

Thanks for your help.
Yes, keep working on it and file an amendment.
Alan S.
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Location: Prescott, AZ

Re: irs didn't catch excess contribution

Post by Alan S. »

Monsterflockster wrote: Wed May 26, 2021 7:16 pm
notmakingmoney wrote: Wed May 26, 2021 6:52 pm Hi,

I noticed quite late (after the Apr 15 deadline) that I had made excess contribution to my 403b. Since it was taking fidelity very long to process the excess contribution paperwork, I decided to file the taxes and let IRS determine the penalty, however, it seems that they processed the return without penalizing for the excess contribution. I believe the penalty is 6% per year the excess amount is left in the account, therefore, I thought I'd ask the folks here what should I do now. Should I continue working with fidelity and employer to return the excess contribution and file an amended tax return or should I leave it as it is.

Thanks for your help.
Yes, keep working on it and file an amendment.
First, IRA excess contribution rules do not apply to qualified plans. You had an excess deferral to the 403b, and since you filed your return, your excess amount should have been included in your wage income. Tax programs will automatically do this when you enter the Box 12 elective deferrals into the program.

By missing the 4/15 deadline to have the excess returned, it will remain in the plan and be taxed again when you finally distribute it from the plan or from a rollover IRA when you take distributions. There is no excise tax, but there will be double taxes eventually far down the road.

There is nothing you can do about this now, except check your return to see if the excess was included in your wages. If not, the IRS should catch it and send you a tax due notice, or you can preempt that by filing a 1040X to include the additional wage income.
Lionel Hutz
Posts: 379
Joined: Sat Jan 30, 2021 12:18 pm

Re: excess contribution to 403b

Post by Lionel Hutz »

No that’s not correct, all requisite earnings are forfeited too. When you send the request to the correct department in the back office they’ll process it correctly.

It’s a 1099-R issued for the year in which the excess distribution occurs, i.e. you won’t get it until the following January.

Double check they don’t have any specific forms or requirements. Usually it’s including the both W2s to confirm the excess amount.

If this was for 2020 year, you’re too late to do the excess removal, you’ll need to discuss with a tax professional about reporting the excess and paying the penalty
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LadyGeek
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Re: excess contribution to 403b

Post by LadyGeek »

notmakingmoney - In order to provide appropriate advice, it's best to keep all the information in one spot. I merged your update back into the original thread. If you have any questions, ask them here.

(Thanks to the member who reported the post and provided a link to this thread.)
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Topic Author
notmakingmoney
Posts: 25
Joined: Sat Mar 06, 2021 10:36 pm

Re: excess contribution to 403b

Post by notmakingmoney »

I will like to share an update and also ask a couple of questions.

For 2021, finally after several iterations, the documents for return of excess contribution (ROE) were accepted by Fidelity.

One question is whether an amended W2 be issued for 2021? And will the withdrawal take place now or at the end of 2022 when they issue the 1099-R?

This will likely close the 2021 problem and leave the 2020 ROE that is still unresolved.

When I talk to Fidelity or my employer, neither have advice on what could be done. The IRS didn't penalize the excess in the 2020 return. I would like to fix the issue. How can I withdraw the excess if I have missed the deadline (Apr 15, 2020). If I just withdraw an amount, then Fidelity would impose a penalty and the withdrawal would not get characterized as ROE. I would appreciate any advice that folks here may have.

Thank you so much!
Not making money.
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