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

[dmertz]

Corrected above to say "... and $100 in box 2a" instead of "... and $200 in box 2."

[kevin_ny_2003]

Thank You so much for your input on this complicated issue.

Kevin

[kevin_ny_2003]

Dmertz:  Unfortunately I have not yet received the 1099-R form from the 401K plan admin company. Please suggest in this case how should I report the excess amount ($2000) + ($100 gain)  in turbo tax in the absence of a code ?

I am worried since the deadline to file the taxes is July 2020. You response will be appreciated.

Thanks much

Kevin

[dmertz]

If you are unsure of the details of the 2020 Form 1099-R that you will be receiving near the end of January next year, you can file your 2019 tax return without it and amend your 2019 tax return when you receive the Form 1099-R.

[kevin_ny_2003]

Thanks for your input 

1) In the absence of 1099-R do I need to report the excess contributions on 2019 tax return without any entry that should that excess was removed ? In this case I will get penalized for excess contribution?

2  ) please suggest do I need to make any adjustments in 2019 W2 amount in “turbotax“ ( for my S corp’s W2)to avoid a penalty for excess contribution since actually the money was withdrawn before April 2020. 
3) Please confirm in the absence of 1099-R What amount should be reported in 2019 tax return in turbotax. 

is there any alternative to avoid filing the amendment?

 Thanks 

[dmertz · Accepted solution]

1)  There is no penalty on your tax return for an excess contribution to a 401(k).  The only requirement is that it appears as taxable income.

2)  No changes to any Forms W-2 should be made.

3)  If TurboTax does not automatically include the excess as income on your tax return, go to Miscellaneous Income, 1099-A, 1099-C -> Other income not already reported on a Form W-2 or Form 1099, answer Yes, continue forward and answer Yes when asked, "Did you earn any other wages?"  Select Other, then enter the amount of the excess deferral with the description of "Excess salary deferral."  TurboTax will include the excess on Form 1040 line 1.

[kevin_ny_2003]

Thank much Dmertz

I entered the "Excess salary deferral."  in Miscellaneous Income section and I see that Turbo Tax added that amount in line 1 of 1040 , few issues

1) Since the actual excess was 2000 and I got back 2100 due to the interest earned while the money was sitting in 401K plan, should I enter 2100 as excess in "Miscellaneous Income section"". When I enter 2000 it adds only 2000 on form 1040 line 1. 

2) After entry of the amount of 2100 in "Miscellaneous Income section" , I see it populated a form 5329-T PARTIII  which somehow thinks the excess was done in a traditional IRA , form 5329 part III "Additional Tax on Excess Contribution to Traditional IRAs"

Is there any way to tell it that the excess was in 401 K and not traditional IRA?

Thanks much again for your help

Kevin

[kevin_ny_2003]

Dmertz: I figured it out, spoke to a TT CPA. she helped me . It seems somehow IRA was selected in my tax form. 

As far the interest amount reporting is concerned, that needs to be reported in the year the amount was taken out, i.e 2020. For 2019 I need to report only the excess amount I contributed.

Thanks again for your help

Kevin

[kevin_ny_2003]

Hi Demertz: I did not  yet receive a 1099-R from the 401 K managing company yet. Is that something I need to follow-up with now?

Thanks

Kevin

[dmertz]

You should expect to receive the 2020 Form 1099-R near the end of January 2021, not in 2020.

[kevin_ny_2003]

I just spoke to them they are saying that form will go out in 2021 since the access was removed in 2020. Does this mean I need to amend my last years tax return or what is the best way to handle this ?

Thanks

[dmertz]

Wait until you get the 2020 Form 1099-R, then check to see that your already filed 2019 tax return agrees with the reporting shown on the Form 1099-R agrees with what you have already reported on your 2019 tax return.  If it doesn't, amend.  There's no reason to worry about it until the end of January 2021.

[kevin_ny_2003]

Dmertz: I received the 2020 1099-R from the 401K company. They have reported the requested removal of access as :

1) Gross Distribution   -- $2100

2a) Taxable Amount -- $100

I verified the 2019 Turbox Tax Return and confirmed that I reported excess amount of $2000 as "Less Common Income ( Miscellaneous Income) ", It show as Line Item 9b as "Excess Salary Deferral" in the Wages Salaries and Tips worksheet since I was told the TT CPA that I need to report the taxable amount of $100 in 2020.

Please let me know if I need to make any amendments in 2019 Tax Return or not?

Thank You very much!

Kevin

[dmertz]

If the Form 1099-R has code P in box 7, unless there is tax withholding shown in box 4 or there is state tax withholding the TT CPA is wrong that this is reportable on your 2020 tax return.

Assuming that the Form 1099-R has code P as expected, If your 2019 tax return does not show the $100 on Form 1040 line 4d, amend your 2019 tax return to include that.  If the $100 is already present on line 4d, there is nothing to change on your 2019 tax return with respect to this.

[kevin_ny_2003]

Thanks DMertz. The code on line 7 of 1099-R says 1,P .

I consulted a TT CPA again and was pointed to this article,

"Under Revenue Procedure 2019-19, 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. "

She is saying that since I did not get a corrected W2 I will be double taxed both in 2019 and 2020 but not 10% penalty since I took the money out before April 15th deadline.  I also asked if I need to amend the 2019 tax return she said "no" as I already reported the $2000 as the income in 2019 and there is  no need to add $100 in the 2019 tax return. 

I am completely lost here and would need your input again. I am just trying to see if there is any way to avoid double taxation on this  and how to best handle this case ?  

Here is the link from IRS site:

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-exceeded-code-402g-li...

I also noticed this in the article 

"

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."

Is that reason that CPA told me last year while filing the 2019 tax return that the earnings are taxable in the year they are distributed , in my case the $100 is the earning and was taken in 2020.

Thanks

Kevin