You should have received a 1099-R for the excess contribution. Have you imported your 1099-R into Turbo Tax? Is the withheld tax included on your 1099-R?
Timely withdrawal of excess contributions by April 15
Excess deferrals withdrawn by April 15 of the year following the year of deferral are taxable in the calendar year deferred.
Earnings are taxable in the year they're distributed.
There is no 10% early distribution tax, no 20% withholding and no spousal consent requirement on amounts timely distributed.
Consequences of a late distribution
Under IRC Section 401(a)(30), if the excess deferrals aren't withdrawn by April 15, each affected plan of the employer is subject to disqualification and would need to go through EPCRS.
Under EPCRS, these excess deferrals are still subject to double taxation; that is, they're taxed both in the year contributed to and in the year distributed from the plan.
For any distributions, attributable to elective deferrals designated as Roth Contributions, all distributions will be reported as taxable in the year distributed. Designated Roth contributions will have already been included in income in the year of deferral.
These late distributions could also be subject to the 10% early distribution tax, 20% withholding and spousal consent requirements.
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 nonhighly 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.
How to find the mistake:
Ensure that no one's elective deferrals exceed the 402(g) limit for a year by comparing the amount deferred to the 402(g) limit. If anyone exceeds the 402(g) limit and this isn't corrected, the plan could be disqualified.
How to fix the mistake:
IRC Section 72(t) imposes a 10% additional tax for distributions that don't meet an exception, such as death, disability or attainment of age 59 ½, among others. To avoid this additional tax, correct excess deferrals no later than April 15 of the following year. If you don't correct by April 15, you may still correct this mistake under EPCRS; however, it won’t relieve any Section 72(t) tax resulting from the mistake.
Under Revenue Procedure 2016-51, Appendix A, section .04, the permitted correction method is to distribute the excess deferral to the employee and to report the amount as taxable both in the year of deferral and in the year distributed. These amounts are reported on Forms 1099-R. These amounts are reported on Forms 1099-R. In the case of amounts designated as Roth contributions, the excess deferral will already have been reported in income in the year of deferral. However, the amount will be reported as taxable in the year distributed.
