Exceeded 401k Contribution. What should I do?

[macuser_22]

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@TaxTechno wrote:

My employer (plan administrator) says that they cannot distribute the excess 401k contribution because they have a cut-off date of 8th April. How should then I report the excess 401k contribution for 2021 or should I just wait until 2022 tax return and amend 2021?

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You will not receive anything in 2022. You report it now on your 2021 tax return this way.

(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 2021 wages on line 1 on the 1040 form as required.

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

[TaxTechno]

Shouldn't I withdraw the excess contribution in 401k with 10% penalty? Otherwise, it seems I will have to pay 6% tax every year on the excess amount and earnings?

[macuser_22]

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@TaxTechno wrote:

Shouldn't I withdraw the excess contribution in 401k with 10% penalty? Otherwise, it seems I will have to pay 6% tax every year on the excess amount and earnings?

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No.  And there is no 10% or 6% penalty for a 401(k).

You pay tax on the excess now as explained above but the excess can then stay in the 401(k) plan because you must pay the tax.   If returned by April 15  then there would be no tax to pay. 

[TaxTechno]

If the excess stays in the 401k account then I have to pay the tax on it every year. I missed the employer April 8th deadline. Can I still ask the employer to distribute for next year to me so that I don't have to pay the tax on the excess contribution year after year?

[macuser_22]

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@TaxTechno wrote:

If the excess stays in the 401k account then I have to pay the tax on it every year. I missed the employer April 8th deadline. Can I still ask the employer to distribute for next year to me so that I don't have to pay the tax on the excess contribution year after year?

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You do not.    That is only for IRA's, not 401(k)'s.

Your excess contribution deducted from your paycheck was in the W-2 box 13 and was not included in the box 1 taxable wages so you have not paid tax on that  money.  That is why it must be included back in your wages on the 1040 line 1 do you pay the tax that was not paid when you earned the money.

It is just part of the 401(k) now and after retirement or you leave the company  ANY distribution from the 401(k) is goint to be taxable income.

[TaxTechno]

That explains it all. Thank you so much for your help!

[ja2001]

Hi, 

This is not a tax filing question, but question about the money in the 401k account.

What happens to the company match in the 401k account ? Let's say there was an excess of $10K and the company matched 50% ($5K). I get the extra allocation of $10K back and do the suggested steps in this thread in Turbotax. All good from a tax perspective.

What happens to the company match of $5K ?

1. Will it remain in the 401K account for me to keep ?
2. Will the 401k administrator return it to the company ?
3. Will it be just taken by the 401k Admin ?

#1 would be awesome, #2 sounds okay/fair 

[macuser_22]

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@ja2001 wrote:

Hi, 

This is not a tax filing question, but question about the money in the 401k account.

What happens to the company match in the 401k account ? Let's say there was an excess of $10K and the company matched 50% ($5K). I get the extra allocation of $10K back and do the suggested steps in this thread in Turbotax. All good from a tax perspective.

What happens to the company match of $5K ?

1. Will it remain in the 401K account for me to keep ?
2. Will the 401k administrator return it to the company ?
3. Will it be just taken by the 401k Admin ?

#1 would be awesome, #2 sounds okay/fair 

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That would depend on the terms of the plan but probably #2 - ask the plan administrator.