Incorrect code in 2019 1099-R box 7

[colorado84]

In 2018 I contributed to 401(k) plans with two different employers after a job change. Upon doing my 2018 tax returns in early 2019 I found that I had inadvertently exceeded my 2018 maximum contributions to the two plans on a combined basis. I therefore requested a $1,884 distribution of excess contributions from one of the plans. Of note:

1. I received the distribution prior to the 2018 return due date of 4/15/19.
2. I included the amount of the excess contribution distribution on my 2018 tax return.

In February 2020 I received a 2019 Form 1099-R from the plan I had received the distribution from. The distribution code in box 7 was “8” ((Excess contribution plus earnings/excess deferrals (and/or earnings) taxable this year) instead of code “P” (Excess contribution plus earning/excess deferrals (and/or earnings) taxable last year). The trust staff/administrator has refused to issue a corrected 1099-R with the correct code “P” even though I pointed out that I notified them of the circumstances and that it was related to 2018.

Question: How should I handle this in my 2019 tax return in Turbotax given that I have already appropriately included the distribution in my 2018 income tax return?

[dmertz]

You should have received two Forms 1099-R, one with code P for the portion that was the excess contribution and the other with code 8 for the earnings.  Unlike an IRA, the earnings are taxable in the year that the distribution is made, not the year for which the returned contribution was made. 26 U.S. Code § 402(g)(2)(c)(ii)

https://www.law.cornell.edu/uscode/text/26/402#g_2

(Prior to the Technical and Miscellaneous Reve­nue Act of 1988, P.L. 100-647 (TAMRA), the earnings were taxable in the year of the deferral, but ever since then the earnings are taxable in the year distributed.  IRS Notice 1989-32)

If you inappropriately included the earnings on your 2018 tax return, you'll need to amend your 2018 tax return to remove the earning from income on that return.  If you received a single code 8 2019 Form 1099-R with only the earnings present in box 2a, that should be sufficient to produce correct taxation even if the amount in box 1 includes both the elective deferral and the earnings, although it implies that it was a 2019 excess deferral that was returned rather than a 2018 excess deferral.

[dmertz]

From Notice 1989-32 (Note that Form W-2P was the form used to report these distributions before Form 1099-R became the form to be used, but the rules are the same):

Corrective Distributions of Excess Deferrals

If a corrective distribution of excess deferrals and income is made timely in the year after the year of the deferral, and the TAMRA rule is used to treat the income on the excess deferral as income for the year of distribution, two separate Forms W-2P must be filed for the year of distribution. The portion of the distribution representing the excess deferral (unadjusted for income) is reported in both the gross distribution box and the taxable amount box on one Form W-2P, and the appropriate distribution code (code "P" for the taxable year before the distribution year) is specified in the code box. The portion of the distribution representing the income on the excess deferral is reported in both the gross distribution box and the taxable amount box on a second Form W-2P, and a current year distribution code (code "8") is specified in the code box. If income on the excess deferral is negative (due to net losses), the reporting proce­dures described below under " Loss on Excess Deferral " should be followed.

[colorado84]

I appreciate your response!

My issue is that the administrator for the 401(k) has incorrectly issued the 1099-R with a code "8" rather than the correct code "P". Without the ability to have a corrected 1099-R issued, how should I handle it in my 2019 tax return (since I've already claimed the income in 2018)? Ignoring it in 2019 would seem to be the answer with the likelihood of it being flagged since the 1099-R has a code 8. But, again, I'm not sure how to handle it.

[colorado84]

And I don't believe there were any earnings. So it should all have been a return of an excess 2018 contribution.

[dmertz]

Is the amount in box 2a equal to the amount in box 1, zero, blank or some other amount?

Is box 2b Taxable amount not determined marked?

[colorado84]

Box 1 and Box 2a are the same amount. Box 2b is blank.

[dmertz]

Yeah, that's a problem.  Assuming that the amount does not represent the amount of earnings distributed, a code 8 2019 Form 1099-R indicates that the elective deferral that was returned was an elective deferral made for 2019, not your excess elective deferral for 2018.

It appears that you'll be forced to file a substitute Form 1099-R (Form 4852) to dispute the code 8 reported on the Form 1099-R, to explain that the payer refuses to correct the coding and to explain that this elective deferral was included on your 2018 tax return and that there were no investment gains attributable to this excess contribution that needed to be distributed.  On the page where you select the type of Form 1099-R you are entering, TurboTax has a box to indicate that you need to file a substitute Form 1099-R (Form 4852).  Doing so will require mailing your tax return.

https://www.irs.gov/taxtopics/tc154

[colorado84]

Ok. That's unfortunate, but thank you for your help with this!