Can anyone help me with a 401k over contribution issue? I am past the April 15th deadline and my employer isn't helping.

[Marina25]

I had a contribution from my previous employer and my new employer 401k, which resulted in over contributing to my 401k.

I am not getting much clarity at all and have no idea what direction to go. This feels like a nightmare. I contacted HR with my employer and they directed me to call Fidelity and to contact Payroll via online ticket process. I called Fidelity and they told me to reach out to the employer to get a form to fill out a return for excess deferral, which was 2 days before the April 15th date. I took action and sent a form to Payroll (from a request ticket online - no way to call them), as well as filed an extension for my taxes. It's been a week later and Payroll from my employer wrote back finally. They told me they can no longer help me since I am past the deadline and that I would have to contact the IRS. I tried calling the IRS, but their automated telephone service tells me to look at their website which does not help with this issue.

How do I go about getting this corrected properly and completing my taxes? I tried contacting a tax assistant on TurboTax Live and they told me to get my money back from my employer, but I told them what my employer told me and they still insisted. This just makes me more confused.

I am not sure how to move forward with this issue? What are the penalties and what happens to the over contribution? Do I have to withdraw it immediately or how can I resolve this so I can complete my taxes properly? Please help!

[Opus 17]

Did you request a filing extension before the original April 18 deadline?

The consequence of making excess contributions is that the excess is added back to your taxable income.  This should be done automatically by Turbotax, although I believe it may not.

@Hal_Al  @dmertz 

You can leave the money in the 401(k), but it will be taxed when you withdraw it.  Since it is also taxed now, that's double taxation, and most people would want to avoid that by removing the excess (which you have to pay tax on now regardless) and investing it somewhere else.

You only have until April 15 to remove any excess. This deadline is fixed in the law even if the tax deadline is later and even if you get an extension. 

You have until the filing deadline to remove the excess.  You would contact the plan, not your employer.  If you did not get an extension, then the deadline is past and it is too late to do anything (even if you have't filed your return, you are past the deadline).  You pay tax now on the excess (because it is not allowed to be contributed tax-free) and you will pay tax again whenever you withdraw the money (usually when you retire).   If you did get an extension, you have until October 15 to contact the plan trustee and have the excess removed and paid to you. 

Either way, the excess deferred salary must be added back to your taxable income.  I have asked a couple other experts who can help you determine if you did that already or if you need to amend.

[dmertz]

The deadline to obtain a return of this excess contribution was April 15, not the due date of the tax return.  The excess will need to be included in income on your 2022 tax return.  The excess contribution does not constitute an addition to after-tax basis in your 401(k), so it will be taxed again when distributed as Opus 17 said; that's effectively the only penalty.  There isn't much point in obtaining a distribution of the funds now since these funds will be taxed the same whenever these funds are distributed.

[Opus 17]

My question is whether Turbotax will automatically detected the excess contributions and add it to taxable income, or whether the add-back must be performed manually by the taxpayer.  I assumed Turbotax would have done this, but someone told me the taxpayer has to do it.  That might affect whether @Marina25  needs to amend or not.

@dmertz 

@Hal_Al 

[dmertz]

My experience is that TurboTax will warn of the excess contribution but will not automatically add it to taxable income.  Automatically adding it to income would cause substantial problems for those who make special catch-up contributions to 403(b) plans, something that TurboTax would inappropriately flag as being excess contributions.

[Marina25]

So, I do not think my question was answered properly at all or I am not following the responses correctly.

Update on May 5th:

1. I filed for an extension for my taxes on April 13, 2023 after I noticed I had an over contribution to my 401K.
2. Fidelity attempted to help me to fill out a return of excess form that in my plan stating that I needed to talk to Payroll from my employer to complete before April 15, 2023. This did not happen in a timely manner because they responded to me on April 25, 2023.
3. When someone from Payroll contacted me (through an online ticketing system, NO PHONE, LIVE CHAT OR EMAIL) they told me I have passed the date an had to contact the IRS.
4. I contacted the IRS and they were not helpful. They directed me to their website which is still the same confusing information I looked at previously.
5. I got full service with an accountant on TurboTax live because this was over my head.
6. The accountant spent 3 hours with me, filed my taxes by placing the over contribution total as 'other income' for my 2022 taxes and my return was accepted.
7. My next steps were to follow up with Fidelity to remove the excess and the total earnings for 2022.
8. May 5,2023 - I called Fidelity and the supervisor told me that since I am past the due date to get the return excess, I can not remove it. I will have the tax penalty next year and receive a 1099-R. I should only be paying for that penalty next during next year's taxes and it will not be reoccurring. Is this true???

I just want to make sure I am doing the right thing and believe the supervisor at Fidelity was telling me that I will now just wait till next year to pay the tax penalty and no longer can remove the excess.
@dmertz @Opus 17 

[Opus 17]

@Marina25 

Did you actually get a withdrawal on April 25? That was a mistake under the circumstances.  But it can probably be corrected or at least mitigated.  

[Marina25]

I did not get anything withdrawn.

[Opus 17]

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@Marina25 wrote:

I did not get anything withdrawn.

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Perfect. Your situation was correctly handled as far as I can tell, although #8 is a little confusing to me, possibly you or the Fidelity rep was confused as well. 

For 2022, your tax return was handled correctly.  The excess deferral was added back your taxable income. There are no further penalties to worry about.  When you withdraw the money in retirement, you will pay income tax on all the withdrawals, you don't get an adjustment for the fact that you paid income tax in 2022 on part of your contributions because they were considered excess.

For 2023, you will not get a 1099-R if you did not withdraw any money.  There are no further penalties for leaving the excess in the account.  The only "bad" consequence is that you will end up paying income tax on that money twice, once in 2022 because it was excess and not removed; and once in the future when you withdraw it in retirement or for any other reason.  (If you had successfully withdrawn the excess before the April 15 deadline, along with the earnings, that would be reported and taxed.  But you didn't make the withdrawal, so you are finished, the situation is closed.)

[Marina25]

Thank you so much! Appreciate all of your help and explanation.

@Opus 17