401k Excess Contribution Late Withdrawal

[sking10]

@DanaB27 I am in a similar situation. I had an excess contribution (a little over $300) in the year 2024. Do I MUST request withdrawal of excess amount by April 15, 2025 or do I have an option to not do anything and just be taxed twice?

[DanaB27]

No, there aren't other options if you want to avoid paying taxes twice. If you do not take out the excess amount by April 15th, then you are taxed twice on the excess deferral left in the plan.  This happens once when you contribute it and again when you receive it as a distribution. You can't include the excess amount in the cost of the contract even though you included it in your income.

If you don't mind paying taxes twice on the amount and your plan allows it then you can leave the fund in the account.

You must include the excess deferral in your wages in the year the excess deferral happened. 

Please follow the steps below:

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 "2024 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

If you receive the distribution of the excess deferral and earnings by April 15th then please note for the Tax Year 2025 tax filing due April 15, 2026: 

• Form 1099-R with Code P in box 7 can be ignored if you reported the excess as described above in 2024. 
• However, the earnings on Form 1099-R with Code 8 in box 7 should be reported in 2025.

@sking10 

[sking10]

@DanaB27 Thank you. Couple of questions:

1. What does "your plan allows it then you can leave the fund in the account." mean? In my situation, there was a change in employers and my total contribution amount across both employers was ~ $300 over the 2024 contribution limit. Do I still need to figure out if either plan allows that?
2.  What does this part mean? "You can't include the excess amount in the cost of the contract even though you included it in your income."
3. If I do not withdraw the excess contributions, should I expect any 1099 form this year or next? Also, does it increase the probability of an IRS audit?
4. If I do decide to request withdrawal of excess funds from my current employer, how would they know if I over-contributed since the contribution through each employer was within the contribution limit?

[DanaB27]

1. No, since the excess was caused by contributing in two different plans it won't apply to you.

2. Generally, when you pay taxes on a contribution then you have a basis and can withdraw it tax-free. But in this case you cannot include that you paid already taxes on it since you will have to pay taxes twice, once on your 2024 return and then again when you withdraw it.

3. No, if you do not withdraw the funds then you will not get a Form 1099-R. No, it shouldn't increase the risk.

4. You will have to tell your employer the amount of the excess deferral.

@sking10 

[sking10]

@DanaB27 Thank you again.  On #4, would they ask for copies of W-2s to verify there was actually an excess contribution? 

Also, the earnings that will be accumulated on the excess contribution will continue to grow year after year.  How is that going to be taxed at distribution if I leave the excess in my account?

[DanaB27]

No, they shouldn't asked for copies of the W-2s.

When you later take a distribution which include the earnings it will be taxable income and taxed according to your tax bracket. It will be treated the same way as any other regular distribution from the 401k. If you take a distribution before 59 1/2 you will pay the 10% penalty unless you meet an exception.

@sking10