Excess 401k contribution between two employers

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

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!

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,

Hello,

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

Thanks,

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

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?

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.

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!

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.

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.

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!

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

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! 

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

Thank you so much! Regarding your comment: 

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

Do you mean later in the year or potentially even after 2022? If after 2022, can I decide at any point in the future? 

Yes, you can decide to take it at any point in the future. Please see Excess deferrals for additional information.

@jss12001

What do you mean when you say "You cannot include the excess amount in the cost of the contract even though you included it in your income"?

i’m in the same boat. dealing w excess after the april 15 deadline.  what’s the best course of action? do i need to withdraw the excess? can i / should i keep it in the account? is there anything special that needs to be done w filing my taxes for 2021? or can i file as per usual? (i filed an extension to sort this out)  thanks so much in advance. 

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@kiz wrote:

i’m in the same boat. dealing w excess after the april 15 deadline.  what’s the best course of action? do i need to withdraw the excess? can i / should i keep it in the account? is there anything special that needs to be done w filing my taxes for 2021? or can i file as per usual? (i filed an extension to sort this out)  thanks so much in advance. 

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If not removed by April 15, then it should not be removed at all since after that date it becomes taxable income that must be reported on line 1 of the 1040 form as wages since it was deducted from wages when the employer withheld if from your pay. It will just stay in the account until retirment when it will be taxed again. This double tax is the penalty for not meeting the Apr. 15 date.

Excess 401(k) deferrals should be reported in:
(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.

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

Hello,

I over-contributed to my after-tax 401k that had led to my total 401k contribution (incl. pre-tax, employer match, and after-tax) exceeding the IRS limit of $61,000. Could you advise what I should do? My pre-tax 401k is below the $20,500 limit though.

Thanks!

Thanks for the thorough advice.

If I plan to pay the tax on excess contribution in 2022 and leave the excess in there until say 2055. Will I pay the tax 2nd time only on the excess amount I put in or also on the earnings on this excess amount from 2022 through 2055? Right now the excess contribution is a couple of hundred dollars. But, if I have to pay taxes on the actual amount + earnings then not sure if the earnings will be a lot more after 33 years!

Any insight into this?

Thanks,

Of course you'll pay taxes on the earnings.  Earnings in a traditional 401(k) account are always includible in income when distributed.  You'll pays taxes on the earnings on an excess deferral the same as you would if the earnings were attributable to contributions that were not excess contributions.  The only reason that you pay taxes twice on the excess deferral itself is that you pay taxes on the excess deferral when contributed and that excess deferral is not permitted to be treated as an after-tax contribution.  The fact that you made an excess deferral that was never corrected has no bearing on the way distributions from the traditional 401(k) account are taxed in the future.

hmm thanks dmertz!

so in essence I'm only paying double tax on the couple of hundred dollars now and at retirement. And I'm paying taxes only once on the earnings of this excess deferral at retirement. So, it makes more sense to leave this amount alone. 

1. Right now: Excess $500 into 401K
-Pay tax now in 2022 [extended tax filing deadline of October 17th for tax year 2021] on $500 [1st time]

2. At retirement: Total amount = $500 + $2000 [approximate earnings in 20 years just on that $500]

- pay taxes on $500 again [2nd time]

-pay taxes on the $2000 which I'd have to pay only once either way irrespective of it being earned on the excess.

Am I assuming correctly?

Thanks in advance.

Correct.