Excess 401K Contribution and 1099 R Code E

Forum|Forum|5 years ago
February 17, 2021
1 reply
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Hi Everyone,

I would like some guidance on how to handle an Excess Contribution to my Self-Employed 401K.

In early April 2020, I inadvertently made an excess contribution of $5,000 to my self Employed 401K - Profit Sharing account for tax year 2019. I filed my 2019 tax return on April 15th 2020.

Three weeks later, in May 2020, I discovered the Excess Contribution, and had the Plan Administrator make a withdrawal of the $5,000 plus $33 earnings under EPCRS program to correct the Excess Contribution. I also filed an Amended 2019 tax return, indicating the $5,033 distribution, and paid the tax.

I just received a 2020 1099-R indicating the $5033 distribution in Box 2a, indicating that it is a Taxable Distribution. Box 7 indicates correctly that this is a correction under EPCRS.

Since I filed an amended 2019 tax return, I have already paid the tax on the $5033.

The problem is that I now have a 2020 1099 R indicating in box 2a that the $5033 is taxable in 2020. I don't want to pay tax on the same $5033 distribution twice.

I checked with the 401K Brokerage, and they will not modify the 1099R to indicate this distribution was related to the prior tax year.

Any suggestions are greatly appreciated!

Not A Product Question

dmertz

Level 15

Unfortunately, double taxation is the penalty for not correcting this with a return of excess contribution by April 15, 2020.

zappohllAuthor

Level 3

Thanks, but that doesn’t sound right. I haven’t read anywhere in the tax code about double taxation when voluntarily correcting an over contribution error.

dmertz

Level 15

As far as I can tell from IRS Rev. Proc. 2019-19, only excess elective deferrals can be corrected by distribution. Excess allocations (employer contributions) are instead to be held in a separate account in the plan to be allocated to participants in subsequent years and the excess is subject to a 10% excess contribution penalty on Form 5330 each year that any excess remains until the separate account is fully consumed.

Since there was a distribution, this apparently was a corrective distribution of excess deferrals. Chapter 4 of IRS Pub 560 describes the taxation of a distribution of excess deferrals made after April 15 where it states that this is subject to double taxation.

Rev Proc 2019-19: https://www.irs.gov/pub/irs-drop/rp-19-19.pdf

2020 IRS Pub 560 is presently only available in draft form: https://www.irs.gov/pub/irs-dft/p560--dft.pdf