Late HCE Excess ADP/ACP

[fixit65]

My contracted ended in 2019, so I rolled my Principal 401K over to my IRA in Fidelity in around March of 2020.  at the end of October I received a letter stating that the contract company failed the non-discriminatory audit & to pull out 11K from my rollover.  I could tell from the number details that something was wrong.  It turned out due to covid issues at the company the audit was never finalized.  So they then made corrections & then on Dec. 30th 2021 I received a corrected rollover 1099-R one for 87K  in box 1 with a distribution code G & another for 2K in box 1 & 2 a and tax code 8.  

The second half of the issue is that I received a 2021 1099R in January for the contribution portion of 11K in box 1 & distribution code 8.  Everything else is blank.

I know both the 2K & the 11K must be adjusted earnings & then pulled out.  

I know I have to file the amended 2020 return & then take the taxed amounts and apply to 2021.  But where am I required to pay penalties since this audit was not completed until 2021 for the year 2019.

[DanaB27 · Accepted solution]

For the excess contribution to a 401k there isn't a penalty calculated on the return but you will be taxed twice on the amount when you remove it late, once when you contribute it and a second time when you withdraw the funds.

The IRS states in Publication 525: "If you take out the excess after the year of the deferral and you receive the corrective distribution by April 15 of the following year, don't include it in income again in the year you receive it. If you receive it later, you must include it in income in both the year of the deferral and the year you receive it (unless the excess deferral was a designated Roth contribution).