Rather unique, I think situation, I need help with: I work for a company that uses a third party to do their benefits/administration (PEO). They administered taking 401K contributions out of my paycheck from Jan to Oct 2020 and the 401K administrator was Company A. I had already met my max contribution during that time and therefore my contributions stopped once I met it.
We switched to a new PEO effective November 1, 2020 and I had to set my contribution percentage in their system. This PEO used Company B as the 401K administrator and then my 401K in general was moved over from Company A into Company B's plan.
While doing my 2020 taxes in March of this year, Turbotax noted that I had excess 401K contributions taken out (because the new PEO took contributions starting November 1st through December 31st) and it instructed me to note whether or not I was getting that excess returned. Upon reaching out to the Company B, I was told I would be getting a check mailed to me for the return of excess funds on March 31. So in Turbotax, I put that info and it said I should get a form next year that would confirm the return of funds when I did my 2021 taxes. After multiple back and forth with Company B and the new PEO, it was determined that checks only went out automatically based on the excess showing up in their systems. Since they were new for me in November and there was no coordination with either the original PEO or Company A, I would need to send my W2s to them before they could do anything. I did that but apparently since it was already after April 15th at that point, they could not return the excess.
I feel that what I need to do is an amended return for 2020 in order to capture that excess as "income" and pay the associated tax on it. Company B is not going to return it and if I take it out since I am not at the 59 1/2 age minimum, I would pay a penalty. If I redo 2020 and pay the income tax on it, can I leave it in the 401K?
Not unique at all - happens all the time when changing employers. In fact neither employer is required to return the excess but most will do it if before April 15 in the year after the excess was contributed.
A return of excess deferrals for 2020 had to be removed before April 15, 2021 or it cannot be removed at all - it just stays in the account, However, since you did not pay any tax on that money when it was contributed, you must pay that tax now. If you already filed 2020 tax return, then you will need to amend and add the amount of excess on the 1040 line 1. Since you will not have a 1099-R to enter then it must be entered as I will show below.
After you retire or take the money out, it will be taxed again That double tax is the penalty for not removing it in time.
The IRS explains this in Pub 525 page 10.
https://www.irs.gov/pub/irs-pdf/p525.pdf
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 taxable excess to your 2020 wages on line 1.