I want @dmertz to review this.
The first step is that the excess deferral is reported as taxable income. That's correct so far.
The normal second step is to remove the excess contribution. That way you can spend it or invest it someplace else since it is taxable income and not tax-deferred. If you leave the excess in the 401k, you will pay income tax when you withdraw the money, meaning you pay tax on those dollars twice. However, because you rolled the funds over from a 401k to an IRA, I suspect you lost the ability to withdraw the excess (even though the accounts are with the same administrator). I think you pay tax on the excess contribution now, but you can't withdraw the excess from the IRA, meaning that when you withdraw it in retirement, you will be taxed again on the same money.
