Delayed discovery of excess 401K contributions

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brockmari
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Delayed discovery of excess 401K contributions

Post by brockmari »

My spouse just received a corrective distribution of his 2022 401K contribution due to “plan limit excess”. This distribution consisted of a check from the 401K Plan and a letter from Vanguard who administers the plan. The letter does not provide any details about the distribution amount, but only states that the taxable portion of the distribution will be reported on a 2024 form 1099-R that we will receive in January 2025, and this taxable portion needs to be included in his gross income for 2022.

I believe this has something to do with the HCE limits being incorrectly applied by company payroll, which was not caught until Vanguard’s delayed analysis of the plan revealed the excess 2022 contribution.:( In 2022, the HCE formulas allowed him to max out all contributions including the $20,500 regular, $6500 catch up, and 4% company match all of which were pre-tax. He additionally contributed 4% (limited by HCE rules) to an after tax 401K which was automatically converted to Roth 401K. BTW he retired in Sept 2023 so we are hoping that the truncated work year will serve to avoid a repeat of this issue for his 2023 contributions.

So now does this mean we will need to file an amended tax return for 2022? Not sure if this is handled by TurboTax and just wanted to confirm: When we receive the 1099-R we should file an amended return for 2022 and pay the additional taxes owed (plus interest?) as well as including that same amount in our 2024 income and paying tax a second time on the same amount? Also I am confused why they refer to a taxable portion. Isn’t the entire amount including the original pre-tax contribution as well as all of the earnings taxable? In which case wouldn’t we be better off filing the 2022 amended return now based on the total amount of the distribution check in order to avoid owing another 8-9 months interest if we wait for the 1099-R?
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leeks
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Re: Delayed discovery of excess 401K contributions

Post by leeks »

You certainly should not report it as income on both 2022 and 2024 taxes.

Was the pre-tax 401K contribution amount reported on your 2022 taxes the actual amount contributed (including the excess) or did they give him an incorrect W2? If they gave him an incorrect W2, shouldn't they have to provide him with a corrected one?

If the W2 was correct, and included an excess pre-tax 401K contribution amount, would the tax software have already treated the excess contributions as taxable? Go back to your 2022 return to check. In that case, wouldn't only the earnings be taxable?

Or maybe it was the post-tax contributions that were in excess?
MarkNYC
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Re: Delayed discovery of excess 401K contributions

Post by MarkNYC »

When a taxpayer has two employers during the year, each with a 401K, the taxpayer sometimes makes "excess deferrals", meaning more than the dollar amount allowed that year. Excess deferrals are taxable in the year deferred and could be taxed again in the year distributed depending on the timing of the distribution.

"Excess contributions" are different. They happen when a Highly Compensated Employee (HCE) defers more than is allowed based on certain ADP testing done after the year-end. Excess contributions (and associated earnings) returned to the HCE are taxable only in the year distributed. (Sec 4979(f)(2)
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brockmari
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Re: Delayed discovery of excess 401K contributions

Post by brockmari »

MarkNYC wrote: Tue May 21, 2024 8:52 pm
"Excess contributions" are different. They happen when a Highly Compensated Employee (HCE) defers more than is allowed based on certain ADP testing done after the year-end. Excess contributions (and associated earnings) returned to the HCE are taxable only in the year distributed. (Sec 4979(f)(2)
This is what I believe happened to us. I have read that the ADP testing is dependent on the proportion of non-HCE employees that participate in the plan. If not enough contribute to the 401K plan then the HCE contributions become more limited. However there is no way to determine this test until after the year end. We have been dependent on the Administrator to promptly return any excess contributions before April of the following year. But Vanguard did not do that. The complication is that Vanguard would have had to make this distribution before April of 2023, not in May of 2024! I have been hearing a lot about Vanguard's problems with maintaining their data. Also recently they have decided to shed all of their small 401K plans. I had thought we were fortunate that our 401K are associated with a large company, however I do blame this late distribution on Vanguard's apparently degrading systems. BTW this is the first time we have ever had an excess contribution distribution--timely or not, and I'm not entirely confident that Vanguard hasn't made some other mistake that would not have required the distribution. Nevertheless we suffer the consequences.

On IRS.gov I see this:

[Unless timely distributed, excess deferrals are (1) included in a participant’s taxable income for the year contributed, and (2) taxed a second time when the deferrals are ultimately distributed from the plan. See IRC Sections 402(g)(1) and 402(g)(2) and Reg. Section 1.402(g)-1(e)(2). A participant who fails to receive a distribution of the excess deferrals does not receive basis in his pre-tax deferral account equal to the amount of excess deferrals. See IRC Section 402(g)(6).]

Also the letter from Vanguard specifically states that the taxable portion of the distribution must be included in 2022 gross income. I am just trying to figure out if we should go ahead and file a 2022 amended return now based on the entire distribution check being taxable--otherwise if we wait until the 1099-R comes in January there will be an additional 8-9 months of interest due.
MarkNYC
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Re: Delayed discovery of excess 401K contributions

Post by MarkNYC »

brockmari wrote: Tue May 21, 2024 10:01 pm
MarkNYC wrote: Tue May 21, 2024 8:52 pm
"Excess contributions" are different. They happen when a Highly Compensated Employee (HCE) defers more than is allowed based on certain ADP testing done after the year-end. Excess contributions (and associated earnings) returned to the HCE are taxable only in the year distributed. (Sec 4979(f)(2)
This is what I believe happened to us. I have read that the ADP testing is dependent on the proportion of non-HCE employees that participate in the plan. If not enough contribute to the 401K plan then the HCE contributions become more limited. However there is no way to determine this test until after the year end. We have been dependent on the Administrator to promptly return any excess contributions before April of the following year. But Vanguard did not do that. The complication is that Vanguard would have had to make this distribution before April of 2023, not in May of 2024! I have been hearing a lot about Vanguard's problems with maintaining their data. Also recently they have decided to shed all of their small 401K plans. I had thought we were fortunate that our 401K are associated with a large company, however I do blame this late distribution on Vanguard's apparently degrading systems. BTW this is the first time we have ever had an excess contribution distribution--timely or not, and I'm not entirely confident that Vanguard hasn't made some other mistake that would not have required the distribution. Nevertheless we suffer the consequences.

On IRS.gov I see this:

[Unless timely distributed, excess deferrals are (1) included in a participant’s taxable income for the year contributed, and (2) taxed a second time when the deferrals are ultimately distributed from the plan. See IRC Sections 402(g)(1) and 402(g)(2) and Reg. Section 1.402(g)-1(e)(2). A participant who fails to receive a distribution of the excess deferrals does not receive basis in his pre-tax deferral account equal to the amount of excess deferrals. See IRC Section 402(g)(6).]

Also the letter from Vanguard specifically states that the taxable portion of the distribution must be included in 2022 gross income. I am just trying to figure out if we should go ahead and file a 2022 amended return now based on the entire distribution check being taxable--otherwise if we wait until the 1099-R comes in January there will be an additional 8-9 months of interest due.
As I mentioned, you have excess contributions not excess deferrals. So why are you quoting the IRS tax treatment of excess deferrals? I think Vanguard is wrong. Your excess contributions should be taxable only in the year distributed, as stated in the specific Code Section I provided above.

On a side note, since the excess was not distributed during the 12 months after the end of the deferral year, the plan could be subject to plan disqualification unless specific remedial steps are taken. But that is a separate issue.
Topic Author
brockmari
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Re: Delayed discovery of excess 401K contributions

Post by brockmari »

MarkNYC wrote: Tue May 21, 2024 10:26 pm
brockmari wrote: Tue May 21, 2024 10:01 pm
MarkNYC wrote: Tue May 21, 2024 8:52 pm
"Excess contributions" are different. They happen when a Highly Compensated Employee (HCE) defers more than is allowed based on certain ADP testing done after the year-end. Excess contributions (and associated earnings) returned to the HCE are taxable only in the year distributed. (Sec 4979(f)(2)
This is what I believe happened to us. I have read that the ADP testing is dependent on the proportion of non-HCE employees that participate in the plan. If not enough contribute to the 401K plan then the HCE contributions become more limited. However there is no way to determine this test until after the year end. We have been dependent on the Administrator to promptly return any excess contributions before April of the following year. But Vanguard did not do that. The complication is that Vanguard would have had to make this distribution before April of 2023, not in May of 2024! I have been hearing a lot about Vanguard's problems with maintaining their data. Also recently they have decided to shed all of their small 401K plans. I had thought we were fortunate that our 401K are associated with a large company, however I do blame this late distribution on Vanguard's apparently degrading systems. BTW this is the first time we have ever had an excess contribution distribution--timely or not, and I'm not entirely confident that Vanguard hasn't made some other mistake that would not have required the distribution. Nevertheless we suffer the consequences.

On IRS.gov I see this:

[Unless timely distributed, excess deferrals are (1) included in a participant’s taxable income for the year contributed, and (2) taxed a second time when the deferrals are ultimately distributed from the plan. See IRC Sections 402(g)(1) and 402(g)(2) and Reg. Section 1.402(g)-1(e)(2). A participant who fails to receive a distribution of the excess deferrals does not receive basis in his pre-tax deferral account equal to the amount of excess deferrals. See IRC Section 402(g)(6).]

Also the letter from Vanguard specifically states that the taxable portion of the distribution must be included in 2022 gross income. I am just trying to figure out if we should go ahead and file a 2022 amended return now based on the entire distribution check being taxable--otherwise if we wait until the 1099-R comes in January there will be an additional 8-9 months of interest due.
As I mentioned, you have excess contributions not excess deferrals. So why are you quoting the IRS tax treatment of excess deferrals? I think Vanguard is wrong. Your excess contributions should be taxable only in the year distributed, as stated in the specific Code Section I provided above.

On a side note, since the excess was not distributed during the 12 months after the end of the deferral year, the plan could be subject to plan disqualification unless specific remedial steps are taken. But that is a separate issue.
Sorry, I missed your previous explanation as to the difference between excess compensation and excess deferral. I was thinking that any excess contribution was a deferral since the tax is deferred. It’s not clear to me whether this distribution is actually due to excess contribution, excess deferral, or a combination. Articles that I have seen online seem to use the terms interchangeably.

This is the exact wording of Vanguard’s letter:

[“Qualified retirement plans like the {COMPANY] 401(K) PLAN (the “Plan”) are administered according to a written plan document. The plan document specifically states that a plan participant may elect to make employee contributions to the Plan subject to a maximum percentage of Compensation (not to exceed 2022 – 305,000). During the year-end analysis of the administration of the Plan, it was discovered that your contributions to the Plan exceeded the maximum allowable amounts as stipulated in the plan document.

The enclosed check represents a corrective distribution of the employee contribution “plan limit excess” made to your Plan account during the 2022 plan year. These funds must be returned in order to comply with the plan document.

As required by the IRS, the taxable portion of the corrective distribution will be reported on a 2024 IRS Form 1099-R, which will be sent to you in January of 2025. The taxable portion of this corrective distribution should be included in your gross income for the 2022 tax year. The amount of your refund is not eligible for rollover into anther qualified plan or individual retirement account (“IRA”).”]

So then does this wording imply that because my spouse earned more than $305K in 2022 he was not allowed to contribute the full Federally allowed limit of $20,500 regular plus $6500 catch up, and some portion of that is considered an excess deferral? Or could there also be an impact due to delayed application of the ADP top heavy rules? His earnings have exceeded that amount for quite a few years including last year when he retired in September. He has always contributed just up to the full 401K Federal limit without exceeding it and there has never been an excess contribution/deferral distribution until now.

Since I’m thinking at this point that there may be some combination of excess contributions and excess deferrals that we won’t know until we receive the 1099-R in January, does it make sense that we should wait for the 1099 and expect that it will clarify which portion is deferred and require an amended 2022 tax return? How to proceed it if is the case that Vanguard is just wrong and we need not include the taxable amount in our 2022 income? I doubt we can convince them of that and once they report the distribution to the IRS showing a taxable amount, how would we convince the IRS that Vanguard is wrong? I also saw an article that indicated that for an excess contribution the tax is owed only at time of distribution however is to be paid within 15 months of the plan end date. In this case we are past the 15 months so does that now trigger the penalty of owing double tax even if this is considered an excess contribution and not an excess deferral? I assume that Vanguard’s statement that “These funds must be returned in order to comply with the plan document” implies that the plan would be disqualified if they don’t follow the rules of which this letter and distribution check are part of the required remedial steps that you mentioned.
MarkNYC
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Re: Delayed discovery of excess 401K contributions

Post by MarkNYC »

It's not possible for a 2024 Form 1099-R to show any amount of a 2024 distribution as being taxable in 2022. Just wait for the 1099-R before proceeding.
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celia
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Re: Delayed discovery of excess 401K contributions

Post by celia »

brockmari wrote: Tue May 21, 2024 10:01 pm We have been dependent on the Administrator to promptly return any excess contributions before April of the following year. But Vanguard did not do that. The complication is that Vanguard would have had to make this distribution before April of 2023, not in May of 2024! I have been hearing a lot about Vanguard's problems with maintaining their data. Also recently they have decided to shed all of their small 401K plans.
Instead of blaming Vanguard, who is just the custodian (holding onto to the assets), you need to know that these plans have "administrators" (or another term) who are responsible for doing the regulatory checks and reporting on these plans. I think of them as subcontrators and these accounts have historically been hosted on a separate platform. (I never had an account like this, but think there were complaints about not being able to see employer plans along with the accounts you managed yourself. So Vanguard may have "fixed" this along the way. Comments from someone else?)

If Vanguard was the sole administrator for this, they would have to charge extra fees which could increase their current fees that are already low. And all of us would have to pay instead of just the plan participants.

You probably can't blame these administrators either. Some (most?) companies may not put the remainder of the years' contribution in until after the year closes, especially if there is a company match. The administrators also have regular year-end and tax reporting functions.

It is what it is. If you don't want to be in this situation again, you could just contribute 80% of the max. When you hear about those other 'add-ons', just think of them as a enticement to join the program (to help the common good) rather than a benefit for the HCEs who participate anyway.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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brockmari
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Re: Delayed discovery of excess 401K contributions

Post by brockmari »

celia wrote: Wed May 22, 2024 11:49 am
brockmari wrote: Tue May 21, 2024 10:01 pm We have been dependent on the Administrator to promptly return any excess contributions before April of the following year. But Vanguard did not do that. The complication is that Vanguard would have had to make this distribution before April of 2023, not in May of 2024! I have been hearing a lot about Vanguard's problems with maintaining their data. Also recently they have decided to shed all of their small 401K plans.
Instead of blaming Vanguard, who is just the custodian (holding onto to the assets), you need to know that these plans have "administrators" (or another term) who are responsible for doing the regulatory checks and reporting on these plans. I think of them as subcontrators and these accounts have historically been hosted on a separate platform. (I never had an account like this, but think there were complaints about not being able to see employer plans along with the accounts you managed yourself. So Vanguard may have "fixed" this along the way. Comments from someone else?)

If Vanguard was the sole administrator for this, they would have to charge extra fees which could increase their current fees that are already low. And all of us would have to pay instead of just the plan participants.

You probably can't blame these administrators either. Some (most?) companies may not put the remainder of the years' contribution in until after the year closes, especially if there is a company match. The administrators also have regular year-end and tax reporting functions.

It is what it is. If you don't want to be in this situation again, you could just contribute 80% of the max. When you hear about those other 'add-ons', just think of them as a enticement to join the program (to help the common good) rather than a benefit for the HCEs who participate anyway.
After some more digging, I realize that the Administrator of the 401K is actually a named person at my husband's former employer. (My husband retired last year so the only way this would happen again is if there is an audit for 2023 or pre-2022 plans where additional errors are discovered. Nothing we can do about past years at this point. We are able to access all information about our 401Ks on Vanguard's site, under a section "employer plans". There is a different customer number to call but it is answered by people who address themselves as associated with Vanguard and all letters are on a Vanguard letterhead. Statements have both Vanguard and the employer's name on them. Also the funds that are available either institutional funds or non-Vanguard funds so I don't think there would be repercussions to general Vanguard investors related to issues with the 401K plans.

Your point about not being able to complete the analysis until after the year end is understood. However May of 2024 is well past the point where I would think any excess contribution or distribution for 2022 could/should have been calculated, and I do question whoever was responsible for missing the timely correction deadline. Perhaps that is this person at the employer who is now named. And though I may sound like I'm blaming people, all I'm actually trying to do is to understand how to proceed with our taxes to minimize the damages.
Last edited by brockmari on Wed May 22, 2024 8:55 pm, edited 1 time in total.
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MP123
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Re: Delayed discovery of excess 401K contributions

Post by MP123 »

brockmari wrote: Wed May 22, 2024 11:10 am So then does this wording imply that because my spouse earned more than $305K in 2022 he was not allowed to contribute the full Federally allowed limit of $20,500 regular plus $6500 catch up, and some portion of that is considered an excess deferral? Or could there also be an impact due to delayed application of the ADP top heavy rules?
Even if he earned more than $305k he could still make the full deferral but it would be subject to ADP testing (as would any deferral). Likely the non-HCEs didn't defer enough for 2022 and so his deferral needed to be reduced to pass testing.

This should have been discovered by the plan administrator (not Vanguard) early in 2023 when it was still possible to correct it for 2022, but at this point I think you just need to wait for the 1099. Vanguard's letter may have boilerplate that doesn't apply. If you receive a 2024 1099 you'll want it to match with your 2024 1040, not 2022.
LotsaGray
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Re: Delayed discovery of excess 401K contributions

Post by LotsaGray »

Based on my experience with V, 401Ks, IRAs and taxes, I would not take ANY tax guidance from V.

If I followed their tax guid@nce it would have cost me about an extra $150k in incorrect taxes. This was confirmed by a 20+ yr enrolled agent, 2 tax specialist CPAs and a 30+ yr tax attorney. Even worse none of the V “experts” would listen to my experts, would not explain their opinions and refused to issue corrected 1099. Mistakes are one thing. Refusing to acknowledge and correct them is not accept@ble.
Topic Author
brockmari
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Re: Delayed discovery of excess 401K contributions

Post by brockmari »

MarkNYC wrote: Tue May 21, 2024 10:26 pm
As I mentioned, you have excess contributions not excess deferrals. So why are you quoting the IRS tax treatment of excess deferrals? I think Vanguard is wrong. Your excess contributions should be taxable only in the year distributed, as stated in the specific Code Section I provided above.

On a side note, since the excess was not distributed during the 12 months after the end of the deferral year, the plan could be subject to plan disqualification unless specific remedial steps are taken. But that is a separate issue.
Sorry for my persistence on this. I was about to set the issue aside until receiving the 1099-R in January but then came across these statements on irs.gov:

["Your plan document may impose its own lower limit on the deferral amount or on the percentage of pay that participants may defer. Additionally, your plan may need to limit a plan participant's elective deferrals to meet certain nondiscrimination requirements.

If the total of a plan participant's elective deferrals exceeds the limit under IRC Section 402(g), to avoid failing IRC Section 401(a)(30), the excess amount plus allocable earnings must be distributed to the participant by April 15 of the year following the year of deferral. Excess deferrals not timely returned to the participant are subject to additional tax."]

and this:

["Excess deferrals distributed to highly compensated employees are included in the Actual Deferral Percentage (ADP) test in the year the amounts were deferred. Excess deferrals distributed to non highly compensated employees aren't included in the ADP test if all deferrals were made with one employer. Excess deferrals distributed after April 15 are included in annual additions for the year deferred."]

Is it possible that an individual Plan Document can define the excess resulting from failed ADP rules as an excess deferral instead of an excess contribution? In which case it seems the only way to confirm whether or not Vanguard's statement that 2022 income is affected is to request a copy of the Plan Document (which we need to request in writing) and read that for ourselves because the 1099-R is not going to resolve that concern.
JoeNJ28
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Re: Delayed discovery of excess 401K contributions

Post by JoeNJ28 »

brockmari wrote: Wed May 22, 2024 2:14 pm
celia wrote: Wed May 22, 2024 11:49 am
brockmari wrote: Tue May 21, 2024 10:01 pm We have been dependent on the Administrator to promptly return any excess contributions before April of the following year. But Vanguard did not do that. The complication is that Vanguard would have had to make this distribution before April of 2023, not in May of 2024! I have been hearing a lot about Vanguard's problems with maintaining their data. Also recently they have decided to shed all of their small 401K plans.
Instead of blaming Vanguard, who is just the custodian (holding onto to the assets), you need to know that these plans have "administrators" (or another term) who are responsible for doing the regulatory checks and reporting on these plans. I think of them as subcontrators and these accounts have historically been hosted on a separate platform. (I never had an account like this, but think there were complaints about not being able to see employer plans along with the accounts you managed yourself. So Vanguard may have "fixed" this along the way. Comments from someone else?)

If Vanguard was the sole administrator for this, they would have to charge extra fees which could increase their current fees that are already low. And all of us would have to pay instead of just the plan participants.

You probably can't blame these administrators either. Some (most?) companies may not put the remainder of the years' contribution in until after the year closes, especially if there is a company match. The administrators also have regular year-end and tax reporting functions.

It is what it is. If you don't want to be in this situation again, you could just contribute 80% of the max. When you hear about those other 'add-ons', just think of them as a enticement to join the program (to help the common good) rather than a benefit for the HCEs who participate anyway.
After some more digging, I realize that the Administrator of the 401K is actually a named person at my husband's former employer. (My husband retired last year so the only way this would happen again is if there is an audit for 2023 or pre-2022 plans where additional errors are discovered. Nothing we can do about past years at this point. We are able to access all information about our 401Ks on Vanguard's site, under a section "employer plans". There is a different customer number to call but it is answered by people who address themselves as associated with Vanguard and all letters are on a Vanguard letterhead. Statements have both Vanguard and the employer's name on them. There is no other 3rd party administering the plan. Also the funds that are available either institutional funds or non-Vanguard funds so I don't think there would be repercussions to general Vanguard investors related to issues with the 401K plans.

Your point about not being able to complete the analysis until after the year end is understood. However May of 2024 is well past the point where I would think any excess contribution or distribution for 2022 could/should have been calculated, and I do question whoever was responsible for missing the timely correction deadline. Perhaps that is this person at the employer who is now named. And though I may sound like I'm blaming people, all I'm actually trying to do is to understand how to proceed with our taxes to minimize the damages.
There is absolutely a third party administrator to the plan because vanguard doesn’t do it. This exact calculation is done by the actuaries at the TPA who then send the info over to vanguard and say we have a problem need to do some adjustments. So I know it’s the cool thing around here to blame vanguard but that doesnt mean it’s true.
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brockmari
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Re: Delayed discovery of excess 401K contributions

Post by brockmari »

brockmari wrote: Tue May 21, 2024 7:56 pm My spouse just received a corrective distribution of his 2022 401K contribution due to “plan limit excess”. This distribution consisted of a check from the 401K Plan and a letter from Vanguard. The letter does not provide any details about the distribution amount, but only states that the taxable portion of the distribution will be reported on a 2024 form 1099-R that we will receive in January 2025, and this taxable portion needs to be included in his gross income for 2022.

I believe this has something to do with the HCE limits being incorrectly applied by company payroll, which was not caught until [the Administrator's] delayed analysis of the plan revealed the excess 2022 contribution.:( In 2022, the HCE formulas allowed him to max out all contributions including the $20,500 regular, $6500 catch up, and 4% company match all of which were pre-tax. He additionally contributed 4% (limited by HCE rules) to an after tax 401K which was automatically converted to Roth 401K. BTW he retired in Sept 2023 so we are hoping that the truncated work year will serve to avoid a repeat of this issue for his 2023 contributions.

So now does this mean we will need to file an amended tax return for 2022? Not sure if this is handled by TurboTax and just wanted to confirm: When we receive the 1099-R we should file an amended return for 2022 and pay the additional taxes owed (plus interest?) as well as including that same amount in our 2024 income and paying tax a second time on the same amount? Also I am confused why they refer to a taxable portion. Isn’t the entire amount including the original pre-tax contribution as well as all of the earnings taxable? In which case wouldn’t we be better off filing the 2022 amended return now based on the total amount of the distribution check in order to avoid owing another 8-9 months interest if we wait for the 1099-R?
I hope this post is not too old for a clarification. In digging through the transactions on the Vanguard site, what I now realize is that the excess contributions were associated with his after tax 401K contributions which were then converted to Roth 401Ks. So the HCE employees were limited to contributing 4% of their pay into the after tax 401K. But there was apparently an additional limitation of gross salary and due to the way the company treats bonuses, the 4% was taken from income that exceeded that salary limit. The check returned included those excess after tax contributions as well as the earnings since 2022. So I presume that the earnings are what will be taxable. Does this have any effect on my question as to whether this taxable amount needs to be included in the income from any previous years (via amended returns) or are we still good to just report it as income in the year received? It's not a lot, about $600 total in earnings.
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celia
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Re: Delayed discovery of excess 401K contributions

Post by celia »

It looks like we're back at the beginning again where you wrote:
brockmari wrote: Tue May 21, 2024 7:56 pm So now does this mean we will need to file an amended tax return for 2022? Not sure if this is handled by TurboTax and just wanted to confirm: When we receive the 1099-R we should file an amended return for 2022 and pay the additional taxes owed (plus interest?) as well as including that same amount in our 2024 income and paying tax a second time on the same amount?
brockmari wrote: Tue Jul 09, 2024 12:10 am I hope this post is not too old for a clarification. In digging through the transactions on the Vanguard site, what I now realize is that the excess contributions were associated with his after tax 401K contributions which were then converted to Roth 401Ks. So the HCE employees were limited to contributing 4% of their pay into the after tax 401K. But there was apparently an additional limitation of gross salary and due to the way the company treats bonuses, the 4% was taken from income that exceeded that salary limit. The check returned included those excess after tax contributions as well as the earnings since 2022. So I presume that the earnings are what will be taxable. Does this have any effect on my question as to whether this taxable amount needs to be included in the income from any previous years (via amended returns) or are we still good to just report it as income in the year received? It's not a lot, about $600 total in earnings.
Did you ever seek clarification from the administrator when the original letter arrived with the check? I would follow their advice. The money returned could be either Roth or tax-deferred and you should get confirmation on that too.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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brockmari
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Re: Delayed discovery of excess 401K contributions

Post by brockmari »

celia wrote: Tue Jul 09, 2024 2:21 am It looks like we're back at the beginning again where you wrote:
brockmari wrote: Tue May 21, 2024 7:56 pm So now does this mean we will need to file an amended tax return for 2022? Not sure if this is handled by TurboTax and just wanted to confirm: When we receive the 1099-R we should file an amended return for 2022 and pay the additional taxes owed (plus interest?) as well as including that same amount in our 2024 income and paying tax a second time on the same amount?
brockmari wrote: Tue Jul 09, 2024 12:10 am I hope this post is not too old for a clarification. In digging through the transactions on the Vanguard site, what I now realize is that the excess contributions were associated with his after tax 401K contributions which were then converted to Roth 401Ks. So the HCE employees were limited to contributing 4% of their pay into the after tax 401K. But there was apparently an additional limitation of gross salary and due to the way the company treats bonuses, the 4% was taken from income that exceeded that salary limit. The check returned included those excess after tax contributions as well as the earnings since 2022. So I presume that the earnings are what will be taxable. Does this have any effect on my question as to whether this taxable amount needs to be included in the income from any previous years (via amended returns) or are we still good to just report it as income in the year received? It's not a lot, about $600 total in earnings.
Did you ever seek clarification from the administrator when the original letter arrived with the check? I would follow their advice. The money returned could be either Roth or tax-deferred and you should get confirmation on that too.
Yes, starting over because I suspect the previous discussion may be invalidated due to the incorrect presumption that it was related to pre tax contributions. I am certain that the returned money is Roth because we see the transaction in his Vanguard account where they withdrew shares of a fund in his 2022 Roth account (converted from after tax contributions) that equals the amount of the check. I'm advised to talk to my tax advisor--which I do not currently have since I haven't needed one in the past, but was hoping to get some guidance here.
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celia
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Re: Delayed discovery of excess 401K contributions

Post by celia »

Yeah, I hate it too when someone says to just ask my tax advisor, when I am my own advisor! (I was also trained and worked for a while as a VITA volunteer.) Like you, I do some research and look for someone knowledgeable about the topic to bounce my questions off of.

Hopefully you haven't amended your 2022 tax return yet. After reading the entire thread again, I would just wait for the tax form and put it on my 2024 tax return. If the withdrawal shows as coming from a Roth account, that and the included growth won't impact your taxes owed. It sounds like you lucked out that it came out of a Roth. Since it also wouldn't impact your 2022 taxes owed, I wouldn't amend that return as it could open a can of worms with the IRS asking why you are amending something that doesn't change your taxes. Just write out your details (or print out this thread) and keep it with your 2022 tax return records in case 2022 gets audited for something else.

The overall rule in filing taxes is that you are reporting things as you believe is true at the time of filing. If the IRS disagrees, they will contact you. But since the amount in question is so small, they probably won't look at it. It doesn't make sense for the IRS or taxpayer to spend hours and hours on this. I would just enter the data on the 2024 tax form you will receive and call it a day.
Alan S.
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Re: Delayed discovery of excess 401K contributions

Post by Alan S. »

The fact that the excess after tax contributions were rolled to the Roth account as an in plan Roth rollover does not change the earlier posts by MarkNYC.

Following is QA 11 from IRS Notice 2013-74:
Q-11. If an employee rolls over into a designated Roth account all of his
or her funds from other accounts in the same plan, what is the proper treatment
of an amount rolled over that is later determined to be an excess amount?
A-11. If an employee rolls over into a designated Roth account all of his
or her funds from other accounts in the same plan and all or a portion of the
rollover is later determined to be an excess deferral described in § 402(g)(2)(A),
an excess contribution described in § 401(k)(8)(B), or an excess aggregate
contribution described in § 401(m)(6)(B), and the excess amount (plus applicable
earnings) is to be distributed from the plan, then the excess amount (plus
applicable earnings) must be distributed from the designated Roth account, even
if the amount was an otherwise non distributable amount at the time of the in-plan
Roth rollover.
In this case, I think that the 1099R will be coded B8 with only the allocated gains shown in Box 2a. Code 8 means that the corrective distribution will be reported on your 2024 tax return. This an excess contribution, not the return of an excess deferral as non Roth after tax contributions are not deferrals. VG was incorrect when they indicated that any of this would be taxable in 2022.

If the 1099R shows something different, please let us know in January what it shows.
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