401k Excess Contribution Issue -- How to best handle the adjustment

[kevin_ny_2003]

I am in a strange situation, I was working through my own S corp and had contributed 

$6000 as employee contribution in Individual 401K through my payroll company.

I joined a new employer in mid of 2019 on W2 ( full time) and started contributing x amount in my new employer's 401K  to ensure I get the employer matching contribution. I am no longer contributing to my individual 401K .

I just noticed that if I continue to contribute the x amount to my new employers regular payroll then I will max out the max allowed amount for 2019 FY of $19000 and would result in over contribution by amount $2100 or would have contributed $21100 by last pay check of 2019.

I have 2 choices

1) Stop my payroll deduction in new employers plan and ensure I am within $19000 limit

2) Withdraw $2100 from my individual 401K and ensure I am within the $19000 limit and report $2100 as income on my 2018 tax returns and amend my W2. I need to do this before April 15 of 2020.

With option 1, I lose my new employer's matching contribution in his 401K plan.

If I go for option 2 then It seems like I need to withdraw $2100 from my individual 401k and then amend my W2 with the payroll company and report that as income.

https://www.investopedia.com/ask/answers/158.asp

Please suggest if Option 1 is ok for me or should I got for option 2 and lose the new employer's matching contribution?

Thanks much

[dmertz · Accepted solution]

The last sentence of your question appears to confuse/interchange Option 1 with Option 2.

Also, in your description of Option 2 you mention the distribution being taxable on your 2018 tax return, but it would actually be taxable income on your 2019 tax return.  The original elective deferral amount would be reflected on your W-2 and the corrective distribution would be reported on From 1099-R.

Regarding obtaining a distribution of $2,100, the distribution would have to be a return of excess deferral, not an ordinary distribution; an ordinary distribution is not permitted except as a hardship distribution and would not correct an excess deferral.  I don't think that you are permitted obtain a return of excess deferral unless an excess deferral between the two plans combined has actually been made.  It seems that you would actually have to make the elective deferrals to the new employer's plan, then, before the deadline for doing so, obtain a return of excess deferral from the S corp's plan.  However, since you are aware of the limit on the amount that you can defer to the new employer's plan after taking into account elective deferrals already made to the S corp's plan and have not yet reached that limit, it seems inappropriate to intentionally make an excess deferral to the new employer's plan just so you could obtain the return of the less favorable elective deferral.  It seems to me that you have an obligation to inform the new employer of the amount of elective deferrals you have already made to the S corp's plan so that they cut off your elective deferrals at a combined total of $19,000.  But that's just my opinion.

A return of excess deferral is required to accompanied by any gain or loss attributable to the excess deferral being returned.  Presumably the return of excess deferral would not be made until after the end of 2019 (and before April 15, 2020), after having made all of the elective deferrals to the new employer's plan, so the distribution of the elective deferral being returned would be reported on a 2020 Form 1099-R with code P, with the excess elective deferral amount reported as income on your 2019 tax return, and any earnings required to accompany the returned elective deferral would be reported separately with code 8, taxable on your 2020 tax return.

[kevin_ny_2003]

Thanks for your response. 

"so the distribution of the elective deferral being returned would be reported on a 2020 Form 1099-R with code P, "

My concern is since the excess contribution amount is derived by combining 2 different 401K Plans , it will not show as excess under a single employers plan ( S corp individual 401k or new employers 401k). Once I take the excess $2100 amount out how will they know to code it as code 'P" on 1099-R which will come in 2020. I can show them the proof of money deposited in other plan , but I am not sure how will they handle it as code 'P' in this case? 

I am concerned they may code it as regular distribution and I may get penalized for early retirement withdrawl.

Please suggest any input , that will be highly appreciated.

Thanks

Kevin

[dmertz]

Reporting with code P is based on your assertion to the plan administrator that you have a combined excess contribution for the prior year and your request to have the excess distributed as a return of excess contribution, not as a regular distribution.

[kevin_ny_2003]

Thanks much.

Do I need to request a corrected W2 at the end of FY2019 with the payroll company that manages the payroll by telling them that I had excess 401K contribution and withdrew $2100 from the plan to be within the $19 K limits.

Do I need to amend any employer's Quarterly tax returns for S corp like form 941 or state tax forms since the excess contribution was done in Q2 2019 

Or 

since this amount was not taxed (401 contribution) for me in my payroll. I simply report that as an income on my personal tax returns for FY2019 as $2100 excess income and pay taxes on them. There is no interest income accrued on the 401K contribution in the S corp's plan.

Thanks

[dmertz]

The latter.

[kevin_ny_2003]

Thanks again.

Can you please also confirm if I need to request a corrected W2 from the payroll company if go for the latter option i.e reflecting that excess $2100 in my individual income tax return while filing the taxes.

Thanks

[dmertz]

No W-2 correction.

[kevin_ny_2003]

Dmertz: Do I need to amend my 2019 Tax return in 2020 when I receive the 1099-R with code 'P'? Is 

https://www.taxact.com/support/1210/2019/form-1099-r-code-p-excess-contributions-401k

Another challenge I am having is that the excess contribution is not showing on any single employer's plan. The $2100 excess only comes in plan when I add all the 401K individual contribution amounts for 2019. How can I prove to the 401k plan admin that I did excess contribution to get a 1099-R with code 'P' in 2020.

Thanks

Kevin

[dmertz]

There will be no need to amend your 2019 tax return if you enter the excess elective deferral amount under Less Common Income -> Miscellaneous income, 1099-A, 1099-C -> Income not already reported on a Form W-2 or Form 1099, answer Yes to "Did you receive any other wages," Answer Yes to "Did you earn any other wages" and select Other.  Doing so will cause TurboTax to include the excess deferral as wages on Form 1040 line 1.

If you are doing in this in 2020, you'll have Forms W-2 from both employers near the end of January 2020 showing the amounts of the elective deferrals.  If you are doing this before the end of 2019 your proof, if needed, is whatever account statements or pay stubs you have showing your elective deferrals to the other employer's plan.

[kevin_ny_2003]

I spoke to the individual 401k plan admin , they sent me a removal of excess contribution form . They said they will issue a 1099-R at the end of Feb 2020.

Do I need to get an updated W2 as well ?

the payroll company is not sure how to fix this in their W2 .

I would appreciate you input .

thanks 

kevin 

[dmertz]

As I mentioned above, no W-2 change.

[kevin_ny_2003]

Thank You so much!

[kevin_ny_2003]

Hi Dmertz: The individual retirement plan company processed the removal of excess form and issued a check for the principal amount + the amount of profit made on that principal. 

I suppose I need to report both these amounts as an income when I file my taxes via Turbox Tax? Please confirm. 

I am also concerned that the excess will now look more than what I had calculated. 

Fox Example: 2019 Max 401k limit 19000

the excess amount I calculated $2000

I got back a check of #2100 for $100 income on the principal from the individual 401k company that processed the excess form. I suppose they will issue me a 1099-R for this.

What amount should I report in Turbox Tax for 401K annual contribution amount 

a) should I report exactly 19000

or

b) 1$9000-$100 ( excess income on the principal)

I generated the annual W2 from my payroll company. It is showing the original amount that I had depoisted with the 401k plan admin company. As you had suggested, I am not filing a W2 correction request and will the steps to report this amount as an income on my personal income tax in turbo tax. Please confirm if that should be fine. 

Thank You

Kevin

[dmertz · Accepted solution]

Wait for your Form W-2 and Form 1099-R.

You'll enter your 2019 Form W-2 as exactly received, presumably with the code D amount of $21,000 in box 12.

I assume that the return of excess contribution was processed in 2019 and you'll be receiving a 2019 Form 1099-R near the end of January.  You'll enter this code 8 2019 Form 1099-R exactly as received.  Presumably this will show $2,100 in box 1 and $100 in box 2a [corrected previous typo].  If so, you'll also need to enter $2,000 as Other income not already reported on a Form W-2 or Form 1099-R.  TurboTax will add the $2,000 and $100 to your wages on line 1 of Form 1040.

TurboTax will not ask you to provide any explanation.  It wouldn't hurt to separately prepare an explanation statement and include it with your mailed tax return, but you could just omit the explanation, e-file, and respond to the IRS with the explanation if they ever ask for it.