Excess 401k contribution between two employers

[Cooldudude20]

Hello,

I changed my job last year. I contributed $19500 (max IRS limit) to EACH employers 401k plan. Earlier this year (in Jan 2022), I filed Return of Excess contribution from my previous employers 401k plan. They returned excess contribution amount ($19500+earning) in Jan itself. I called Fidelity, they says I will receive 1099-R next year (2023).

I am looking for some guidance on how to file tax return for 2021. Should I ask my former employer to give me new W2 with amendment? Is there any other better way to handle this situation?

I will appreciate any guidance you can provide!

Thanks,

[MinhT1 · Accepted solution]

Reporting excess salary deferrals (excess 401k contributions) returned to you after the end of the tax year but by April 15th of the following tax year on your 1040.  Do not create your own 1099-R for this situation.

Pages 10 and 11 of IRS Pub 525 under Excess deferrals (the IRS term for 401K contribution is deferral) tells us to include the excess deferrals as income on line 1 of Form 1040 if the money was returned after the end of the tax year but by April 15th of the following tax year.  You need to report only the excess contribution, not any money generated by the investment of the excess contribution.  What you earned will be covered by a 1099-R for the following tax year and will be entered then as a normal 1099-R.

Below is how to do this in TurboTax:

• Click on Federal in the left-hand column, then on Wages & Income
• Under All Income, scroll down to Less Common Income
• Select Miscellaneous Income and click Start
• Select Other income not already reported on a Form W-2 or Form 1099 and click on Start
• Answer the question "Did you receive any other wages?  Yes
• Click through the questions till you get to Any Other Earned Income
• Answer Yes to Did you earn any other wages?
• Indicate Other as Source of Other Earned Income and click Continue
• For the description enter "2021 Excess 401K Deferrals" and click on Done

[Cooldudude20]

Thanks a lot MinhT1 for your quick response!

So, I only have to add excess contribution ($19500 in my case) as part of Wages..and I don't need to request new W2 with amendment to my former employer...the gains I had from excess contribution will be added during 2022 tax filing next year (in 2023)...Is my understanding correct?

Really appreciate your help!

Thank you!

[Cooldudude20]

one more question, do I have to change the amount in box 12D on W2 to $0 since we are adding excess contribution amount in line #1?

Thanks,

[Cooldudude20]

Hello,

Can you please try to respond to my earlier question regarding adjusting amount in W2 box 12D to $0?

Thanks,

[MinhT1]

No, you do not adjust box 12d of your form W-2 to 0. You enter box 12d as reported on form W-2.

[Cooldudude20]

Thank you MinhT1! 

I updated excess contribution in 'Less common income' section. It did update my wage info in line #1 of 1040.

And if I don't update the 12D box in W2 (keep as is) then TT complains I have overpayment for 401k. 

 It seems TT is asking me to correct this step by manually entering 1099-R whether or not I received 1099-R.

Will TT allow me to e-file without correcting this?

[MinhT1]

You will receive the form 1099-R next year only. So you do not have form 1099-R.

TurboTax is only warning you that you have an excess contribution. Now that you have reported the excess contribution as I indicated, all is well and you can e-file.

[Cooldudude20]

Got it! Thanks a lot MinhT1! Appreciate your support!

I guess, next year when I receive 1099-R with code P, I will have to ignore it.

And I only have to process  2nd 1099-R with code 8 which is for excess contribution earning for filing Tax return for 2022.

Appreciate your help again!

[imadgreat]

I have exact same situation. But I recognized this issue earlier in the year and asked my retirement plan to refund the money. They asked me prove my contribution to previous employer. Once that was done, they sent me the check for my contribution. Now, they also issued a 1099-R which shows the amount as a "taxable withdrawal". I have added 1099-R in my income section in TT. But turbo tax still warns of contributing more than allowed limit. Do I just ignore the warning? Also, there is a $1 discrepancy for some reason. I am guessing that when money was deducted from my plan and by the time the issue was resolved, my plan had a $1 loss - just my guess. Please let me know how to proceed.

[Cooldudude20]

Which brokerage firm you have? In my case, I did inform Fidelity in last August that I have over contribution situation but they told me I can't file return of excess until I get both companies W2 (which I had to wait till Jan 20222). 

Anyways, good that you got 1099-R, I think as per MinhT1, TT will flag it as warning (about 401k over contribution) but we should ignore it, as long as you enter 1099-R showing your income as taxable. I would try to get corrected 1099-R if possible, $1 extra shouldn't have any negative impact though. This is just my opinion, I am not tax expert.

[jerelyn00]

I have excess salary deferral of $2,752 between two employers. My most recent employer is stating that I am compliant in their plan because I am still under the limit allowed; however, between the two employers I am over the amount. Is there an option if I can't get the money refunded back from my employer? How do I report that correctly on my taxes for this year? Thanks!

[DanaB27]

You will need to add the excess to your wages even if you are not able to get the excess withdrawn. Please follow these steps:

1. Login to your TurboTax Account 
2. Click "Federal" from 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 "2021 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 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.

@jerelyn00

[jss12001]

I'm in a similar boat. I've over contributed to my 401k across two employers in 2021. Unfortunately, I just realized this now and there isn't enough time to get the excess contributions returned by April 15th. Should I be filing my taxes as you mentioned by including the excess contributions as income in the "Less Common Income" or do something else? 

Secondly, can you confirm or correct what I should do next: I should still contact my employer and retirement plan provider to correct the problem so they can return the money and send me a 1099-R for next year. I understand that I'll be taxed again on the excess contribution + any gains. Is that right? 

Btw, your advice and answers are very thorough. Thank you so much for helping the community! 

[DanaB27]

Yes, you will have to include the excess in your income with the steps below.

Yes, since the excess isn’t withdrawn by April 15th you will pay taxes twice on the excess deferral left in the plan.  This happens once when you contribute it (with the steps below) and again when you receive it as a distribution (include the Form 1099-R in your income).

Since you are penalized by paying taxes twice, you can decided if you want to remove the excess now or at a later time. 

1. Click "Federal" from the left side of your screen
2. Scroll  down to "Less Common Income" and click "Show More"
3. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
4. Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
5. On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
6. Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
7. On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
8. On the "Any Other Earned Income" screen enter "2021 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

@jss12001