Could anyone can help me with the 401k excess contribution issue which could not be removed with Fidelity?

[hjinhua415-gmail]

I worked for two companies last year. Each company didn't hit the limit. But when it combined, it hit. Starting from February, I submitted the removal of excess contribution request to Fidelity. They required the signature for section 5 Plan Sponsor Approval because they said this removal needs to be initiated through employer. I talked to local HR and asked her to sign and submitted the request again. But fidelity said it was not the right person and they could not tell me who is the right person. I called the HR helpline. The HR said the system has auto-stop function and their 401k didn't over contribute. So he could NOT help me and emphasized this message many times during the conversation. After two months, back and forth, and more than 10 phone calls with fidelity, it seems I run into a dead end. Anyone can help with this situation? Could I use early withdrawal to remove the excess contribution? But not sure if it can serve the purpose and not sure how to proceed with tax return. If I do early withdrawal before 4/15, I need to pay 10% penalty which is fine and the plan will withhold Federal and State taxes. The 1099R form will be received possibly in 2024. Do I need to file the tax for the excess contribution removed by early withdrawal this year?

[DanaB27]

First, you will have to add the excess deferral to your wages with these steps (no matter if you receive the distribution before April 15th or not):

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 "2022 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

Please be aware, 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 (with the steps above) 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 cannot get the excess deferral distributed by April 15th,  but get it after April 15th then it will be a regular distribution and be fully taxable and subject to the 10% early withdrawal penalty.

If you receive the distribution of the excess deferral and earnings by April 15th then please note for the Tax Year 2023 tax filing due April 15, 2024: 

2023 Forms 1099-R will be issued reporting the excess.

• Form 1099-R with code P in box 7 can be ignored if you reported the excess as described above in 2022. 
• However, the earnings on Form 1099-R with Code 8 in box 7 should be reported in 2023.

[hjinhua415-gmail]

Hi DanaB27, 

Thank you for your helpful explanation. I will report the excess contribution as you suggested, and I appreciate your guidance on this matter. However, I still have a few questions I was hoping you could help me clarify.

Firstly, when reporting the excess contribution, should I also correct Box 12 on my W-2 form?

Secondly, I have been having difficulty removing the excess contribution from my account with Fidelity, as they require employer sponsorship which I am unable to obtain. If I am unable to remove the excess amount by April 15th, do I still need to remove it? Alternatively, would it be better to wait until I am 59.5 years old to avoid the 10% penalty? If I remove the excess contribution after I turn 59.5 years old, I believe the following will apply right?

1) I should not be charged the 6% penalty for the excess contribution each year since the IRS will have already charged me for the 2022 tax report.

2) I would only need to pay double tax for the excess contribution, which in my case is $1,300. This means I would need to pay taxes for the year I made the excess contribution as well as for the year in which I remove it.

3) When I remove the excess contribution, I will need to pay taxes on any earnings associated with it

Finally, if I need to remove the excess contribution as soon as possible after April 15th, do you have any suggestions on how to do so? As mentioned earlier, I have been having difficulties removing the excess contribution through the regular process with Fidelity. Would it be advisable for me to remove the excess through an early withdrawal, or are there other options available?

Thank you once again for your assistance!

[DanaB27]

No, you don't change your W-2 box 12 entry, enter it as shown on the W-2.

Yes, if you can't get it removed by April 15th then you can wait to remove it until you are 59 1/2 (if the plan allows that). The distribution will be a regular distribution and will be taxable income but not subject to the 10% penalty when you are 59 1/2.

1. Excess deferrals to a 401(k) are never charged a 6% penalty (this applies for IRA excess contributions) the "penalty" is if you don't remove the excess before April 15th you will be taxed twice on the amount.

2. Yes only the excess of $1,300 will be taxed twice. Once on your 2022 tax return with the instructions I provided in my previous post and then again when you take the distribution (reported on Form 1099-R).

3. Yes, the earnings will be taxable income.

@hjinhua415-gmail 

[hjinhua415-gmail]

@DanaB27  Thanks for the clear and detailed replies! For my case, each 401k account didn't hit the limit. When they combine, yes, they hit. So the plan allows to remove until 59.5 years old, right? 

[DanaB27]

Yes, it should but you can check with them.

@hjinhua415-gmail 

[hjinhua415-gmail]

@DanaB27  Thanks again for your great help!