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ivydreamz
Level 2

Over Contributed to 401k and past the deadline to return excess

Hello, I changed jobs in 2021 and ended up over contributing about $2k towards my 401k for CY 2021. I missed the deadline to return excess contribution (April 15) . I now have an excess contribution towards my 2021 401k and since I am past the deadline my company plan administrator cannot return the excess.

 

In reading related questions on this forum I see the path forward is to just leave the excess contribution in my account.

1. Do I need to file an amendment on my 2021 taxes to report this or do I just address it in my 2022 taxes? 

2. How do I ever correct the excess? Don't want to have to continue to pay a penalty every year till I finally can withdraw (past 59.5 years).

 

Thanks in advance!

1 Best answer

Accepted Solutions
Opus 17
Level 15

Over Contributed to 401k and past the deadline to return excess

1. Check your 2021 tax return.  The excess is not allowed to be excluded from your income and must be added back to your line 1 taxable income. Any tax software should have detected the excess contribution from the items in your W-2s box 12, code D or code AA.  The tax software should have told you that you have an excess and suggest you remove it.  If you told the software you would remove the excess and you didn't, then you do need to prepare an amended return to change your answer.  The $2K excess is added to your taxable income so you will owe a tax payment with your amended return.  However, if the excess was detected and already reported with the excess added to line 1, you don't need to do anything more.

 

2. There is no ongoing penalty for an excess 401k contribution.  It is just over.  You will pay tax on all your withdrawals when you retire, even though you already paid tax on the $2K excess contribution.  That's the "cost" of the error, paying income tax twice on that $2000 excess amount.   

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

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4 Replies
Opus 17
Level 15

Over Contributed to 401k and past the deadline to return excess

1. Check your 2021 tax return.  The excess is not allowed to be excluded from your income and must be added back to your line 1 taxable income. Any tax software should have detected the excess contribution from the items in your W-2s box 12, code D or code AA.  The tax software should have told you that you have an excess and suggest you remove it.  If you told the software you would remove the excess and you didn't, then you do need to prepare an amended return to change your answer.  The $2K excess is added to your taxable income so you will owe a tax payment with your amended return.  However, if the excess was detected and already reported with the excess added to line 1, you don't need to do anything more.

 

2. There is no ongoing penalty for an excess 401k contribution.  It is just over.  You will pay tax on all your withdrawals when you retire, even though you already paid tax on the $2K excess contribution.  That's the "cost" of the error, paying income tax twice on that $2000 excess amount.   

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Mike9241
Level 15

Over Contributed to 401k and past the deadline to return excess

Excess not distributed. If you don't take out the excess amount, you can't include it in the cost of the contract even though you included
it in your income. Therefore, you're taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution (unless the excess deferral was a designated Roth contribution. You must include the excess deferral in your income for the year of the deferral. File Form 1040 or 1040-SR to add the excess deferral amount to your wages on line 1.

 

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).

 

Under that Reg the excess is treated as an employer contribution so you have no tax basis in it and that's why it is taxable when withdrawn (ROTH a/c exception)

 

so yes you need to amend 2021 to report the excess contribution as income.

there is no penalty for an excess 401(k). just that you will have income twice. once in the year made and eventually when you withdraw it,

 

here are the rules for withdrawing the excess late IRC 401(k)(2)(B)

(B)under which amounts held by the trust which are attributable to employer contributions (the excess is regarded as an employer contribution) made pursuant to the employee’s election—
(i)may not be distributable to participants or other beneficiaries earlier than—
(I)severance from employment, death, or disability, - thus the excess would have to come from your former employer's plan 
(II)an event described in paragraph (10), such as plan termination
(III)in the case of a profit-sharing or stock bonus plan, the attainment of age 59½,
(IV)subject to the provisions of paragraph (14), upon hardship of the employee,
(V)in the case of a qualified reservist distribution (as defined in section 72(t)(2)(G)(iii)), the date on which a period referred to in subclause (III) of such section begins, or
(VI)except as may be otherwise provided by regulations, with respect to amounts invested in a lifetime income investment (as defined in subsection (a)(38)(B)(ii)), the date that is 90 days prior to the date that such lifetime income investment may no longer be held as an investment option under the arrangement,

 

 

 

ivydreamz
Level 2

Over Contributed to 401k and past the deadline to return excess

Thank you Opus17. This was very helpful. I will review my tax returns to check to see if the excess was detected and already reported with the excess added to line 1. If not, I will proceed to file an amendment. 

ivydreamz
Level 2

Over Contributed to 401k and past the deadline to return excess

Thanks Mike9241 for the detailed response and pointers. Will follow up.

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