401k excess salary deferral in 2020 but missed Apr 15 deadline

[jgnagy]

I changed employers in 2020 and accidentally exceeded the 401k contribution limit. I did not realize this until after the Apr 15 deadline. I have contacted my employer's benefit provider and they have initiated the process to withdraw the excess, but have informed me that it will not likely be completed by the May 17 filing deadline. I know the amount of the excess contribution, but not the amount of the earnings on it. Do I need to file an extension for both my Federal and State (CA) returns or is there a way to correctly complete my returns by the filing deadline? Once the withdrawal is complete, what is the correct process to follow for my 2020 returns? I understand I will get a 1099-R to report the withdrawal on my 2021 returns, which seems fairly straightforward.

Thank you!

John

[DanaB27 · Accepted solution]

You will have to include the excess contribution to your wages on your Form 1040, using the instructions below.  

Since you did not get the excess distributed to you by 4/15/2021, you will end up paying taxes on the amount twice: First on your 2020 Tax Return and then again when you withdraw the money during retirement.  

Please follow the steps below:

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 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 "2020 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

Please note for the Tax Year 2021 tax filing due April 15, 2022: 

• The earnings on Form 1099-R with Code 8 in box 7 should be reported on your 2021 tax return.
• Form 1099-R for a 2020 excess deferral distribution should have code P in box 7. If you didn't add the excess deferral amount to your wages on your 2020 tax return, you must file an amended return on Form 1040-X. If you didn't receive the distribution by April 15, 2021, you must also add it to your wages on your 2021 tax return.

Please see Pub 525 page 10 and 11 for additional information.

[jgnagy]

Thank you so much for your reply. For the amount I report on my 2020 returns, do I need to report the earnings on the excess salary deferral as well? Or do the earnings only get reported on the 2021 return? I only know the excess deferral amount and wont know what the earnings were until I get the distribution from the provider. That distribution probably won't arrive by the May 17th filing deadline. Thank you again!

[DanaB27]

The earnings will get reported on your 2021 return. Therefore, you will only report the excess deferral amount on your 2020 tax return.

[jgnagy]

Thank you again!

[tucustomer]

Hi, 

I do have similar situation with slight different.  Could you please assist ASAP.

a) Turbo Tax online product shows, 401K excess contribution can be withdrawn till May17th 2021. I got same information from Turbo Tax Live help. However, my plan administrator/employer says, IRS didn't  extend 401K excess contribution date (found same information in IRS as Apr 15th) and deadline is crossed.  I do have below questions. Which one (IRS or Turbo Tax) is correct? 

b)  My employer/plan administrator says, the withdrawal amount will be considered as early withdrawal of 2021 contribution and not 2020 contribution. In addition, Federal tax of 20% and state tax has to be paid along with early with drawl penalty. I'm already added steps mentioned in my 2020 return.  Is it true? Will this be early withdraw and penalty will be applied?

2) What happens if existing 401K excess contributions to convert to Traditional/Rota IRA? Do I need to still pay the penalty?

3) What happens if I keep excess 401K contributions in 401k account as I have already in misc. additional income and paying taxes for same amount in this year return.

Please advise and Thanks for advance

[DanaB27]

a) The IRS didn't move the date for the 401k. Therefore, you had to remove the excess before  April 15th, 2021 to avoid double taxation. Please see IRS April 8th 401k announcement: "If an individual defers more than this limit for 2020, the excess deferral amount plus earnings must be distributed by April 15, 2021. Excess salary deferrals not withdrawn by April 15 are taxable in 2020 and again when withdrawn. The date to remove excess salary deferrals has not been extended."

b). If you receive it later than April 15th, you must include the excess deferral amount in income in both the year of the deferral and the year you receive it (2020 Publication 525 page 11). Yes, you would have to pay the 10% early withdrawal penalty on the distribution if you are under 59 1/2.

2) No, if you rollover or convert the amount you would not pay the 10% penalty. Please be aware a conversion would be included in your taxable income.

3) Excess not distributed. If you don't take out the excess amount, you can't include it in the cost of the contract even though you included it in your income. Therefore, you're taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution. (2020 Publication 525 page 11)

Since you didn't remove the excess by April 15th, 2021 you will use the steps below to report the excess deferral on your 2020 tax return and when you withdraw the amount it will be a taxable distribution.

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 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 "2020 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

@tucustomer