@dmertz wrote:
Double-taxation is effectively the penalty that you pay for the excess employee contribution whether the excess contribution is made to the traditional account or to the Roth account.
Treasury Decision 9324, Internal Revenue Service, 2007-22 I.R.B. 1302 states:
Thanks. So the taxpayer would be required to keep track of their excess deferral until they retire, and then voluntarily declare that the first dollars withdrawn from the Roth 401K are taxable, until the excess deferral and attributed earnings are used up (distributed). The 401k plan custodian won't know about this issue, and while the IRS has the information available to them (via the W-2s), it seems unlikely that they will actually track the issue for 20 or 30 years. It seems to be entirely voluntary.
In this situation, it would be easier for the taxpayer to take the position that all the excess deferral is attributed to the pre-tax accounts, and declare that on their tax return as taxable other earned income on line 1h (or on an amended return) and pay the tax. That way there would be no excess in the Roth account and nothing to keep track of.
