excess contribution from ADP/ACP failure

[kg70]

I changed jobs in 2022 and rolled over my 401(k) from the former employer into my IRA.  The former employer failed ADP/ACP tests for 2022, and they just (June 2023, well after I filed 2022 taxes) mailed me two 2022 1099-Rs, one for the excess contribution (code 8 ) and one for the new lower rollover amount (code G). They both have the CORRECTED checkbox on top checked.

My understanding is that ADP/ACP excess contributions are taxed on the year they are distributed, so I think I should now (June 2023) request from the IRA custodian a distribution for the amount shown on the 2022 1099-R with code 8, and when I receive the 2023 1099-R from the IRA custodian I just report it as 2023 income.

My question is, do I have to amend my 2022 tax return?  Pub 590A states:

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Excess due to incorrect rollover information.

If an excess contribution in your traditional IRA is the result of a rollover and the excess occurred because the information the plan was required to give you was incorrect, you can withdraw the excess contribution. The limits mentioned above are increased by the amount of the excess that is due to the incorrect information. You will have to amend your return for the year in which the excess occurred to correct the reporting of the rollover amounts in that year. Don’t include in your gross income the part of the excess contribution caused by the incorrect information.

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So do I just amend the federal 2022 return to correct the rollover amount  (line 5a) and that's it? (no 2022 tax implications since rollover tax is 0).  No adjustment for gross income, since that will be reported in the 2023 return.  If the above is correct, I suspect the 2022 state return does not need to be amended.

thanks

[dmertz]

Yes, you need to amend your 2022 tax return.

The amount reported with code 8 on the Form 1099-R form the 401(k) was not eligible for rollover to the IRA, so that amount now constitutes an excess contribution to the IRA.  Assuming that you filed your 2022 tax return or requested a filing extension by April 18 2023, you have until October 16, 2023 to obtain a return of excess contribution (not a regular distribution) from the IRA to avoid having to report an excess-contribution penalty on Form 5329 that would otherwise have to be included with your amended 2022 tax return.  Your amended 2022 tax return will also need to include an explanation of the investment gain or loss that must accompany the returned IRA contribution.  If there is a gain, the gain must be included on the 2022 tax if the rollover occurred in 2022.  If the rollover occurred in 2023, the gain will go on your 2023 tax return instead.