401K Excess Contribution for tax year 2022 and refund check with losses

[shonkho]

Hello,

I made excess contribution to 401k for tax year 2022. The broker Fidelity returned me not just the excess deferral but also the incurred losses on the excess deferral amount.

- Had 2 employers in 2022

- Maxed out my pre-tax traditional 401K with Employer A ($20,500 IRS Limit) for 2022.

. I also contributed $13000 pre-tax to my 2nd Employer Bs traditional 401K in 2022.

- Total contribution over IRS limit in 2022 to 401k plan - 13000$

- I left my contribution to Employer Bs 401k intact and decided to request excess deferral from Employer A's broker, Fidelity.

- Sent Fidelity W2s of both employer in Jan 2023 suggesting them to refund me a check for 13000 $

- Fidelity, after review, sent me a refund check for 11000$ in March 2023. The 2000$ difference in refund was explained to me as loss incurred on the original 13000$ amount.

Q : Should i input my 401k deferred income in  "other" category in TT to reflect 13000$ or should i report it as 11000$ with losses incurred. Fidelity only sent me a check and no 1099-R. Or should i report 13000$ as deferred income for 2022 401k excess and then report 2000$ as loss for tax year 2023?

[DanaB27 · Accepted solution]

If this was a 2022 excess deferral return in 2023 (before April 15th, 2023) then the 13K excess deferral will have been reported in your 2022 tax return and the $2,000 loss will have to be reported on your 2023 tax return.

Please follow the instructions below to report the excess deferral on your 2022 tax return:

1. Login to your TurboTax Account 
2. Click "Wages & Income" (under Federal) on the left side of your screen
3. Scroll  down to "Less Common Income" and click "Show More"
4. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
5. Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
6. On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
7. Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
8. On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
9. On the "Any Other Earned Income" screen enter "2022 Excess 401(k) Deferrals" for the description, enter the amount ($13,000) and click "Done".

To report the loss next year on your 2023 tax return:

1. Login to your TurboTax Account 
2. Click "Federal" from the left side of your screen
3. Scroll  down to "Less Common Income" and click "Show More"
4. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
5. Select "Other reportable income" and click "Start"
6. Answer "Yes" to "Any Other Taxable Income?"
7. Enter "Loss on Excess Deferral Distribution” and enter the loss as a negative number (-$2,000)

Please see  Pub 525 for additional information.

[shonkho]

Thanks a bunch, appreciate the detailed insights.

[ForeverILoveAtlanta]

I have a very similar question. In my previous research, a different community expert responded to the same type of question last year and indicated that if the excess funds are returned after the tax year but before 4/15, do not create a 1099-R and instead include the returned funds as income on line 1 on the 1040, then follow misc income instructions referenced above.  This appears to be slightly different from your earlier response. Also, with-in TurboTax, in the drop down box for the description, there is only a selection for "2021 Excess 401k Deferrals" but no option for "2022 Excess 401k Deferrals".  Is there any update to the s/w required?  

[DanaB27]

You can either create Form 1099-R or use the steps above (which seems easier) because both result in adding the excess deferral to your wages on line 1 of Form 1040.

If you follow the instructions above you will need to enter the description "2022 Excess 401k Deferrals".

If you are entering Form 1099-R and using code P then please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2021" you can ignore that since the follow-up question answering this is a 2023 Form 1099-R will tell TurboTax that it will be taxable in 2022.

@ForeverILoveAtlanta 
 

[fibraid]

Thank you for the answer(s) above.

What is to be entered as "other income" when this is a

a)  disbursement for a 2022 excess 401(k)  contribution dispersed in 2023 before 4/15/23

   i)    IF federal taxes have been withheld from the disbursement

   ii)  AFTER accounting for the investment loss before returning the balance to me?

Excess contribution:$1269.17

Loss: ($114.72)

Gross payment: $1154.45

Fed Income tax withheld: ($115.45)

Amt of disbursement provided: $1039.00

The plan states that 

$1154.45 is the taxable portion for both federal and state.

-----------

Yet Federal Tax has been withheld (a default %, not the actual due)

A)  Is the $115.45 tax already accounted for in what would be reflected in the 2022 W2 (2022 Fed taxes) OR

B) Is this 2023 Fed Tax paid on a 2022-based reimbursement received in 2023 and therefore should be reported as 2023 income (amount of net reimbursement)?

.

[DanaB27]

No, the taxes were withheld in 2023 and therefore will be applied to your 2023 taxes paid. You will need to enter the 2023 Form 1099-R on your 2023 tax return to get the taxes withheld in 2023 applied to 2023.

You will enter the full excess deferral of $1,269.17 on your 2022 tax return:

1. Login to your TurboTax Account 
2. Click "Wages & Income" (under Federal) on the left side of your screen
3. Scroll  down to "Less Common Income" and click "Show More"
4. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
5. Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
6. On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
7. Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
8. On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
9. On the "Any Other Earned Income" screen enter "2022 Excess 401(k) Deferrals" for the description, enter the amount of $1,269 and click "Done".

If you receive the distribution of the excess deferral and earnings by April 15th then please note for the Tax Year 2023 tax filing due April 15, 2024: 

Generally, Form 1099-R with code P in box 7 can be ignored if you reported the excess as described above in 2022 but since you had taxes withheld you will need to enter it on your 2023 tax return. TurboTax will know to ignore the distribution because of the code P but apply the taxes to 2023.

The loss will have to be reported on your 2023 tax return:

1. Login to your TurboTax Account 
2. Click "Federal" from the left side of your screen
3. Scroll down to "Less Common Income" and click "Show More"
4. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
5. Select "Other reportable income" and click "Start"
6. Answer "Yes" to "Any Other Taxable Income?"
7. Enter "Loss on Excess Deferral Distribution” and enter the loss as a negative number (-$115)

Please see Pub 525 for additional information.

@fibraid 

[Vinitavvp]

For 2022 I am just adding excess contribution as other wages not reported on w2.
not reporting them with code 8.  
Do I need to file amended return in 2023 when I receive 1099-r or just file 2023 return with 1099r information ? 

[DanaB27]

Yes, you will add the excess deferral (regular 401 (k)) to your 2022 tax return with these steps:

1. Login to your TurboTax Account 
2. Click "Wages & Income" (under Federal) on the left side of your screen
3. Scroll  down to "Less Common Income" and click "Show More"
4. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
5. Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
6. On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
7. Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
8. On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
9. On the "Any Other Earned Income" screen enter "2022 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

Please be aware, if you made excess deferrals to a Roth 401(k) then these will not be added to your 2022 return.

If you receive the distribution of the excess deferral and earnings by April 15th then please note for the Tax Year 2023 tax filing due April 15, 2024: 

• 2023 Form 1099-R with code P in box 7 can be ignored if you reported the excess as described above in 2022 (Don't file an amended return).
• However, the earnings on 2023 Form 1099-R with Code 8 in box 7 should be reported in 2023.

@Vinitavvp 

[g94]

What about for my Pennsylvania state return? TurboTax doesn't seem to add this additional misc. income to my state taxable income? How should I update the PA State section?