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

[tucustomer]

Hi,

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a) Turbo Tax online product shows, 401K excess contribution can be withdrawn till May17th 2021.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. Which one (IRS or Turbo Tax) deadline 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 and state tax has to be paid along with early with drawl penalty. Is it true? Will this be early withdraw and penalty will be applied?

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

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

Please advise and Thanks for advance

[macuser_22 · Accepted solution]

April 15 was the deadline as prescribed by law.  It is not related to the filing date.

If you missed that date then you still must enter the excess amount as taxable wages.     The excess (and earnings) should just remain in the account.    When you retire  and take distributions then the distributions will be taxable.   You do not get to claim the excess as an after-tax contribution.   That double tax is the penalty for missing the Apr. 15 date to remove it.

Excess 401(k) deferrals should be reported in:
(There are several screens to click through to get to the right place)

Miscellionious Income ->
Other Income not reported on a W-2 ->
Other wages (yes) ->
House Hold employee (Continue) ->
Sick Pay (Continue) ->
Other earned income (yes) (Includes excess salary deferrals)->
Source of income (other) ->
Any other income - enter the amount of the excess deferral and an explanation.

This will add the returned excess to your 2020 wages on line 1.

[tucustomer]

Thanks for update. Do you have any insights on the below as it is crossed Apr 15th dead line.

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 and state tax has to be paid along with early with drawl penalty. Is it true? Will this be early withdraw and penalty will be applied?

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

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

[macuser_22]

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@tucustomer wrote:

Thanks for update. Do you have any insights on the below as it is crossed Apr 15th dead line.

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 and state tax has to be paid along with early with drawl penalty. Is it true? Will this be early withdraw and penalty will be applied?

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

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

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b)  Yes, do not withdraw it - there is no reason to touch it until you retire.

c)  There is no tax advantage to do that.  A Roth conversations is taxable and  Traditional IRA is the same as not doing anything - no gain, not loss, and no reason to do that.

d) Answered above.   It just stays in the  account and will grow in value with all other money in the account.

When finally distributed it is treated as all other money in the account and will be taxable as ordinary income.

[tucustomer]

Thanks for update. I observed below information in IRS site and will impact current 401K plan.

"If the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan"

Excess not withdrawn by April 15. If the employee does not take out the excess deferral by April 15, the excess, though taxable in the year of deferral, is not included in the employee's cost basis in figuring the taxable amount of any eventual benefits or distributions under the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan.

Retirement Topics - What Happens When an Employee has Elective Deferrals in Excess of the Limits? | ...

Do you have any insights on this?

[macuser_22]

If the plan itself made the error and created the excess then they MUST return the excess or the plan could be disqualified whether before or after April 15.     If the excess was created because there were two or more employers (as is usually the case with excesses)  and each employer did not exceed the limits then neither employer is obligated to return it.,   The plan is obligated to be sure that they do not over withhold and create an excess and if they do it must be returned.  That would be reported to you with a 1099-R box 7 code E.

If the plan is a non-qualified plan then the rules are different but a 401(k) is a qualified plan.

[geoffhuang]

For anyone filing in 2022, on the left tab you need to be on "Federal", and the subsection you select is "Less Common Income". From there, a "miscellaneous income" section will be present, and you can follow the above steps.