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Eric1001
Returning Member

Excess Contirbution to 401k in 2020 - Please help

Hi,

 

Due to having multiple employers in 2020, I mistakenly contributed $39K to 401k ($19,500 for each employer). I have not filed my taxes yet  for 2020 as I have extension until Oct, 2021. Issue is that when I file my taxes, Turbotax says I have excess contribution and I need to withdraw $19,500 from one of the employers. When I called Fidelity, they said they will issue a check for $19,500, but the 1099-R will show 2021 date on it with code P (excess contribution for 2020) and they will mail this form on January of 2022.  They also said they will deduct taxes (estimated) for both federal and state. This does not help me as I really want the form now so that I know what to input in the tax software, and also I need the form to show 2020 date so that I can file my taxes for 2020 before Oct, 2021 deadline. On their view, I am in a new tax year and passed April, 2021 deadline for any correction although I have not as I have extension. 

My question is what is the best way to go about it without having to pay penalty or being double taxed? I am confused now as to what I need to do this year and what I need to do next year for 2021 tax year.

3 Replies
macuser_22
Level 15

Excess Contirbution to 401k in 2020 - Please help

What does Fidelity have to do with it - a 401(k) is an employer plan.   The contributions would be reported in box 12 on your W-2 (or W-2's if you have two).   Is that is how it was shown?

 

However, it is a 401(k) then  April 15, 2021 was the last day that the excess could be returned plus any earnings attributed to the excess.   After April 14, 2021 the excess (and earnings)  must remain in the 401(k), but since you did not pay any tax on that income that was in box 12 (code D) in your W-2, you must pay that tax now in your 2020 tax return (or amended 2020 tax return).

 

That means, when you finally take distributions from the 401(k) that money will be taxed a 2nd time (just like other distributions).   That double tax is the penalty for not removing  prior to the April 15 date.

This is explained in IRS pub 525.

 

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

 

Report it this way:

 

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 2020 wages on line 1.

 

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
Eric1001
Returning Member

Excess Contirbution to 401k in 2020 - Please help

Hi Macuser 22,

 

Fidelity is the plan administrator for my previous employer.

 

With the request from my previous employer, they did allow me to withdraw the money with IRS Code E. 1099-R has not been issued yet, but when I login to the system I see a draft form showing "2021" 1099-R with Code-E. It also shows "estimated" tax has been withheld for both federal and state. Is it still possible to avoid double taxation?  Turbo tax software suggest I pay the taxes now and then next year when I receive the physical copy of 1099-R only put the gains.  Not sure how to go about it to file my taxes for 2020 to avoid double taxation with the given Code E. 

 
macuser_22
Level 15

Excess Contirbution to 401k in 2020 - Please help

A code E is a special case.   It means that the distribution is under EPCRS which plan administrators correct error that the plan made.   It is not a normal "return of contribution" and unless it is a designated Roth (403(k) Roth)), it is fully taxable.

 

It is not reported as above but the code E 1099-R is entered in the 1099-R interview.  The tax will be on the 1040 line 5b.

 

[This usually only happens it you only have a single employer and the plan should know if the limit has been exceeded since they have control and the plan makes an error.  Multiple employers where each plan is within it's own limits should never issue a code E 2099-R - however, some plan administrators do it incorrectly and issue a code E when it is inappropriate to do so.      Probably not worth arguing about. since either way it is taxable - only how it is reported is different.]

 

Per the IRS instructions for a code E 1099-R:

 

Distributions Under Employee Plans Compliance Resolution System (EPCRS)

The procedure for correcting excess annual additions under section 415 is explained in the latest EPCRS revenue procedure in section 6.06 of Rev. Proc. 2019-19, 2019-19 I.R.B. 1086, available at IRS.gov/irb/2019-19_IRB#REV-PROC-2019-19.

 

Distributions to correct a section 415 failure are not eligible rollover distributions although they are subject to federal income tax withholding under section 3405. They are not subject to social security, Medicare, or Federal Unemployment Tax Act (FUTA) taxes. In addition, such distributions are not subject to the 10% early distribution tax under section 72(t).

 

You may report the distribution of elective deferrals (other than designated Roth contributions) and employee contributions (and earnings attributable to such elective deferrals and employee contributions) on the same Form 1099-R. However, if you made other distributions during the year, report them on a separate Form 1099-R. Because the distribution of elective deferrals (other than designated Roth contributions) is fully taxable in the year distributed (no part of the distribution is a return of the investment in the contract), report the total amount of the distribution in boxes 1 and 2a. Leave box 5 blank, and enter Code E in box 7. For a return of employee contributions (or designated Roth contributions) plus earnings, enter the gross distribution in box 1, the earnings attributable to the employee contributions (or designated Roth contributions) being returned in box 2a, and the employee contributions (or designated Roth contributions) being returned in box 5. Enter Code E in box 7. For more information, see Rev. Proc. 92-93, 1992-2 C.B. 505.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
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