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If my employer will not make a corrective distribution for an overfunded 401K, do I keep the additional contributions in 401(k)s and report overfunded 9K as other income?

Overfunded 401(K)s in 2017 because I had two jobs:  Deferred $9K at 1st job.  Deferred $18K plus $31K in defined contributions at 2nd job.  I'm over the 2017 $18K limit for deferred contributions and the $54K limit for total contributions.  Neither employer will make a corrective distribution since "accounting year is closed."  

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Level 15

If my employer will not make a corrective distribution for an overfunded 401K, do I keep the additional contributions in 401(k)s and report overfunded 9K as other income?

Assuming that your regular contributions were traditional elective deferrals and not Roth contributions, because these were excluded from the income reported in box 1 of your W-2 from the two employers, the $9,000 must be added back to your income.  To enter the $9,000:

  • Go to Miscellaneous Income, 1099-A, 1099-C -> Other income not already reported on a Form W-2 or Form 1099
  • Answer Yes to Did you receive any other wages?
  • Proceed through the unrelated questions, then answer Yes to Any Other Earned Income?
  • Select Other as the source of the other earned income
  • Enter your $9,000 of excess elective deferral

TurboTax will include the $9,000 on Form 1040 or 1040A line 7.

The "penalty" for the excess deferral will be that this money will be taxable again when later distributed from the 401(k) as part of a regular distribution at some point in the future.

As for the $54K limit, that limit is a per-plan limit, not a per-individual limit.  You apparently contributed $18K in regular contributions and $31K in after-tax contributions to the second employer's plan.  As long as this employer did not contribute more than $5,000 in matching or profit sharing contributions, the $54K limit was not exceeded.  If the total employee and employer contributions to this plan did exceed $54K, the employer MUST make the correction or risk disqualification of the company's entire retirement plan.

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1 Reply
Level 15

If my employer will not make a corrective distribution for an overfunded 401K, do I keep the additional contributions in 401(k)s and report overfunded 9K as other income?

Assuming that your regular contributions were traditional elective deferrals and not Roth contributions, because these were excluded from the income reported in box 1 of your W-2 from the two employers, the $9,000 must be added back to your income.  To enter the $9,000:

  • Go to Miscellaneous Income, 1099-A, 1099-C -> Other income not already reported on a Form W-2 or Form 1099
  • Answer Yes to Did you receive any other wages?
  • Proceed through the unrelated questions, then answer Yes to Any Other Earned Income?
  • Select Other as the source of the other earned income
  • Enter your $9,000 of excess elective deferral

TurboTax will include the $9,000 on Form 1040 or 1040A line 7.

The "penalty" for the excess deferral will be that this money will be taxable again when later distributed from the 401(k) as part of a regular distribution at some point in the future.

As for the $54K limit, that limit is a per-plan limit, not a per-individual limit.  You apparently contributed $18K in regular contributions and $31K in after-tax contributions to the second employer's plan.  As long as this employer did not contribute more than $5,000 in matching or profit sharing contributions, the $54K limit was not exceeded.  If the total employee and employer contributions to this plan did exceed $54K, the employer MUST make the correction or risk disqualification of the company's entire retirement plan.

View solution in original post