I received a check (net after federal and state deducted) from my 401K plan administrator in March 2024 for "a distribution of Return Of Excess (ROE) contributions and or company match dollars for highly compensated employees". Then on Feb 2025, I received another letter from the plan administrator stating that the refund was processed in error and that I may choose to return the excess amount we received to our Plan account or choose to keep the fund. I decided to return the funds and remitted a certified check (gross amount) in the same month to repay the the excess amount refunded to me.
I received a 1099R for the return of excess distribution. When I entered this 1099R on my tax return, my federal tax and state tax liabilities increase significantly (even without early withdrawal penalty). Since I have repaid the funds back to the 401K plan and this is by no means my mistake, I would think I should not be made to pay the taxes. How should I report this on our 2024 tax return?
