Due to a change in payroll providers, in 2020 too much was taken out for my 401k. What do I do now that the payroll company says it’s too late to return it?

[Pinevalleyite]

Initially they said they’d return the excess so I noted that on my 2020 taxes, that I’d be getting a document from them in 2021 for the excess return. What do I do now?

[macuser_22]

It is too late to remove it now so it just stays in the account and will be taxed when you finally withdraw it probably after you retire.

However, the excess is also taxable as income on your 2020 tax return since the contributions reduced the taxable wages so you must add that amount of the excess back in.    If that sounds like double taxation, it is and that is the penalty for not timely removing the excess plus earnings.

On  your 2020 tax return (or amended tax return if you already filed), enter it this way.

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.

For information see IRS Pub 525 page 10
https://www.irs.gov/pub/irs-pdf/p525.pdf

[Pinevalleyite]

Thank you. I figured there was no easy way to capture this in 2021 and I’d have to amend 2020 and you’ve confirmed that. Super annoying because I was communicating with the payroll company about this immediately in March 2021 and they assured me they were refunding it. Then as time  went by and I didn’t get it and followed up, I got the runaround until finally escalating it and being told the employees I had been speaking to at their company were misinformed and would be retrained to ask for the w2s or prove the excess prior to April 15th. Had they been knowledgeable I would have been saved a lot of time, aggravation, and now additional tax and penalty.

[macuser_22]

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@Pinevalleyite wrote:

Thank you. I figured there was no easy way to capture this in 2021 and I’d have to amend 2020 and you’ve confirmed that. Super annoying because I was communicating with the payroll company about this immediately in March 2021 and they assured me they were refunding it. Then as time  went by and I didn’t get it and followed up, I got the runaround until finally escalating it and being told the employees I had been speaking to at their company were misinformed and would be retrained to ask for the w2s or prove the excess prior to April 15th. Had they been knowledgeable I would have been saved a lot of time, aggravation, and now additional tax and penalty.

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A 2020 deferred plan excess had to be removed not later then  April 15, 2021 for a 2020 contribution.   Some people equate that date with the tax return due date which is also April 15 in most years, but deferred to May 17 for 2020 tax returns, but the April 15 date for excess is hard coded into the law and has nothing to do with the tax return due date.

(Since the excess can remain in the account and earn earnings until retirement, this could actually be to your advantage in the long term.   Either if returned or not, you must add the excess to your 2020 taxable income so that is a wash either way.   The only difference is all future distributions from the account, including the amount of excess, will be taxable as ordinary income when distributed.   If by retirement time, the tax on the amount of excess is less than the earnings that the excess earned, you are money ahead.)