Excess 401k contribution in 2017. But plan administrators don't let me withdraw!

[ctak07]

Excess 401k contribution in 2017. I changed job in 2017 and after I inputted both W-2, I exceeded the 18k. I notified both plan administration and both don't let me withdraw the excess contribution. What should I do? 

I also read the following from IRA, but don't get what that means:

"Excess not distributed. If you don't take out the excess amount, you can't include it in the cost of the contract even though you included it in your income. Therefore, you are taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution. " - https://www.irs.gov/pub/irs-pdf/p525.pdf (Page 10)

If they allowed me to withdraw, I would follow the following link to fix the issue: https://ttlc.intuit.com/questions/3877165-excess-401k-contribution-in-2016-should-i-report-it-using-... 

[Rachel_W · Accepted solution]

Basically, the quote you included form IRS Publication 525 is stating that if your excess 401(k) contribution is not taken out by the due date of your return, you will end up being taxed twice on the amount because they are not allowing you any type of basis when you are taxed the first time.  So you are taxed on the excess contribution now AND when you take the money out in the future.

I would highly recommend talking to the plan administrators again and explaining the situation so that you can withdraw that money before April 17, 2018 and avoid the double taxation.

If you are able to withdraw the excess contribution in time, you can report the excess contribution on line 7 of your 2017 Tax Return without a Form 1099-R by following these steps: 

• Click on the "Federal Taxes" Tab
• Click on the "Wages & Income" Tab
• Click on "I'll choose what I work on"
• Scroll down to "Less Common Income"
• Select "Miscellaneous Income" and click Start or Update
• 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 until 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 "2017 Excess 401K Deferrals" and click on Done

[dmertz]

Note that, under these circumstances, neither employer is *required* to make a return of excess contribution and there seem to be many employers who will not.

[ctak07]

That does seem like the case. Both of my employers are not letting me withdraw. What should I do? Are there other ways to fix this?

[dmertz]

If the employers are uncooperative, there is nothing you can do.  You'll pay taxes on the excess amount in 2017 and the money will again be taxed when distributed from your 401(k)s.  Hopefully the amount of the excess was not substantial.

[ctak07]

what does it mean by "distributed from you 401(k)s"? If employer don't cooperate, does that mean, I have to pay penalty every year till I retire and withdraw money?

[dmertz]

No, there is no excess-contribution penalty on this in 2017 or any other year.

Someday you will make distributions from your 401(k)s.  As TurboTaxRachelW indicated, the excess amount on which you paid taxes in 2017 is not treated as after-tax basis in your 401(k)s, so you simply pay taxes again on the same money when eventually distributed as part of a regular distribution.

[Anonymous]

I'm in the same situation.  Let's say the overcontribution was $1000.  Do you pay taxes the second time during distribution (at time of retirement) on that $1000, or is it also on the earnings?  Thanks!

[macuser_22]

@paulnelsonee  - Earnings in a 401(K) are always taxable when when withdrawn.  The $1,000 just becomes part of the before tax contributions (even thought you have paid tax on it once already) so you will pay tax on the same $1,000 again when distributed - that is the penalty for failing to timely removing an excess contribution.

[Anonymous]

Thank you for the reply.  I have a Roth 401K so taxes are paid upfront.  What I'm trying to find out is if taxes will be paid on the principal of $1000 or earnings as well.  For a Traditional 401K, I agree with you.  I did a bit more digging.  According to the IRS, it looks like I can have the funds removed and pay a 10% penalty: <a rel="nofollow" target="_blank" href="https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-exceeded-code-402g-li...>

[macuser_22]

Per that publication:
"For any distributions, attributable to elective deferrals designated as Roth Contributions, all distributions will be reported as taxable in the year distributed. Designated Roth contributions will have already been included in income in the year of deferral."

Which means that when distributed the amount of excess plus and earnings will be included in your income as taxable income.

The 10% is not an alternative.  The 10% is an ADDITIONAL early distribution penalty in addition to the normal tax that applies if you are under age 59 1/2 at the time of the distribution for late distributions of excess contributions not withdrawn by the due date of the tax return.

[Anonymous]

Thanks for the reply.  Understood that 10% is an additional early distribution penalty.  Bottom line: I want to have the excess funds removed asap rather than leave them in the account, correct?

[dmertz]

I think that correcting an excess Roth 401(k) contribution for 2017 needed to be done by April 15, 2018.  I don't think that there is anything that can be done about it now unless the employer is required to make the correction.

[dmertz]

I think it's still necessary to tell the employer about the excess contribution.  According to the above-referenced IRS web page, the distribution of an excess contribution after April 15 is taxable even though it was a contribution to the Roth 401(k).  The excess Roth IRA contribution does not add to the contribution basis.  The consequences are the same as if the excess was an excess deferral to the traditional 401(k) account:  double taxation of the excess contribution and a 10% early-distribution penalty on the distribution if made before age 59½.  You can't make the withdrawal until you have a triggering event, either reaching age 59½, becoming disabled or leaving the company.

Had the distribution of the 2017 excess been done by April 15, 2018, none of the distribution, including the attributable earnings, would be subject to an early-distribution penalty.  An early-distribution penalty on the earnings distributed with a return of contribution by the due date of the tax return only happens with a return of contribution from an IRA.

[2manydogs]

How do you file your taxes if the employer says they are not going to return the excess?