401K excess contribution - deadline to withdraw

[shung]

I made an excess contribution to my 401K due to job change mid-year 2020. TurboTax is saying that I have until May 17th (tax filing date) to withdraw the excess funds from my account without incurring additional tax.  However, ADP is saying that the deadline is April 15th and refuses to action the withdrawal. The IRS publication on this matter states April 15th, but we weren't sure if there was any latitude for interpretation since many similar issues seem to be tied not to the specific April 15th date, but to the tax filing date.

If we already missed the window for which we can do the reversal, then I guess we'll have to keep the excess contribution in the account and pay tax again in the year we receive the distribution as per normal with all the other funds that are in the 401K account?

[macuser_22]

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@shung wrote:

If we already missed the window for which we can do the reversal, then I guess we'll have to keep the excess contribution in the account and pay tax again in the year we receive the distribution as per normal with all the other funds that are in the 401K account?

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Yes, April 15 was the last day the excess could be returned.  You still must report it as an excess and pay the tax on the excess and will be taxed again when finally  distributed.    That is the penalty for missing the removal date.   (The upside is because the security market has been strong, you actually might be money ahead with the excess still invested and earning income that might exceed the tax.)

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 exactly the same way that the 1099-R would. The only information that is sent to the IRS is the line 1 amount.

[shung]

Thank you for the clarity of your response. I did follow the guidance to report the excess as income in my 2020 tax return.

I guess TurboTax should update their Help guidance to say April 15th (and not May 17th!) as the deadline for withdrawing the excess funds.

[macuser_22]

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@shung wrote:

Thank you for the clarity of your response. I did follow the guidance to report the excess as income in my 2020 tax return.

I guess TurboTax should update their Help guidance to say April 15th (and not May 17th!) as the deadline for withdrawing the excess funds.

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Where does TurboTax say that about 401(k)  excess?     May 17 is the last day that excess *IRA* contributions can be returned. 

[shung]

This was the TurboTax pop-up when the issue was flagged based on my W-2 data: 

Steps to Take to Remove an Excess Salary Deferral
1. Figure out which retirement account you want to remove the excess salary deferral from. You can use IRS Publication 560, Retirement Plans for Small Business, to help you decide.
2. Notify the plan administrator (the company or broker that handles your retirement account) that you have an excess salary deferral as soon as possible.
3. Withdraw the funds no later than May 17, 2021 to avoid paying additional taxes on the excess deferral.
4. Report the excess deferral on your 2020 return in the Income section for Retirement Plans and Social Security whether or not you received a Form 1099-R before you file your return. Enter as much information as you can. Report the excess deferral amount in boxes 1 and 2a, and use code P in box 7. Indicate that this is a 2021 Form 1099-R.
5. In 2021, you will probably receive two Forms 1099-R. One reports the excess deferral amount. The other reports the earnings on the excess deferral. Enter both of these forms in your 2021 return, and we'll only add
the earnings to your 2021 income.

[amir75]

I am in a similar situation, slightly overcontributed to 401k due to job change and did not discover it until April 16th.

Now, administrator from a new 401k plan refuses to process the withdrawal since it is after the 4.16th. They are telling me that I have to wait for 3 years to be able to make that excessive contribution withdrawal due to plan restrictions. Is it OK to wait that long until withdrawal if I declare the overcontributed amount and pay income tax on it on 2020 return?

[macuser_22]

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@amir75 wrote:

I am in a similar situation, slightly overcontributed to 401k due to job change and did not discover it until April 16th.

Now, administrator from a new 401k plan refuses to process the withdrawal since it is after the 4.16th. They are telling me that I have to wait for 3 years to be able to make that excessive contribution withdrawal due to plan restrictions. Is it OK to wait that long until withdrawal if I declare the overcontributed amount and pay income tax on it on 2020 return?

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You do  not need to withdraw anything until your retire.     Any withdrawal after the date for a return of excess contribution will be a taxable distribution.    That is the penalty for not removing it prior to the due date.

[amir75]

Thank you so much for responding. I was just worried that by not correcting it right away it might result in additional penalties to me or to the plan. If I understand correctly, it does not matter when I withdraw the excess, now or any time later, I just get taxed at the time of withdrawal. And an income tax at the year of excessive contribution, of course. 

[macuser_22]

The date to remove excess deferrals is April 15, of the year following the contribution.  The Apr 15 date is not the due date of the tax return, the tax law specifically says "April 15" but can even be before depending on the terms of the 401(k) plan.   The IRS's delay of the filing date to May 17 did not change the tax law.

See internal Revenue Code 26 CFR § 1.402(g)-1(e)(2)(i)

(2) Correction of excess deferrals after the taxable year. A plan may provide that if any amount is an excess deferral under paragraph (a) of this section:

(i) Not later than the first April 15 (or such earlier date specified in the plan) following the close of the individual's taxable year,

[macuser_22]

Yes it must be included as wages on the 1040 line 1.

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.

[amir75]

Thank you.

Yep, April 15th was the deadline and unfortunately  I missed it. So now it will get double taxed - that is OK, the total excess contribution is $103, not a big deal to get it taxed twice.

But I still need to remove it from the plan at the earliest possible time, right? Or it does not matter when I remove it since it is being double taxed anyway?  Thanks again for your responses, very helpful..

[macuser_22]

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@amir75 wrote:

But I still need to remove it from the plan at the earliest possible time, right? Or it does not matter when I remove it since it is being double taxed anyway? 

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No.    Leave it alone until you retire - it is just part of the plan now the same as all other funds in the 401(k).

[sanjubaba]

In the same boat, did not inform the administrator before Apr 15th, and now they refuse to withdraw excess.

If everything was done before Apr 15, my understanding was, the excess funds would have been withdrawn

The excess funds would be taxed for tax year 2020, you will probably not get a 1099-R, so have to report it

And the earnings on this excess will be taxed 2021, for which you will get 1099-R

The question I have is, now that the excess funds cannot be withdrawn as it is after April 15

- I can report the excess as other income, and live with the double taxation, when I withdraw after retirement

- What about the earnings on the excess, is that okay that it will only be taxed when it is withdrawn in retirement, or this is something that has to also be calculated in for 2020 or 2021 and reported.

If so, how would you only calculate the earnings of just the excess?

Thanks

[macuser_22]

The earnings are not a contribution and just stay in the account.    Once yiu add the excess to the 2020 1040 line 1 you are done.

[Balak]

I’m in the same situation. My brokerage refused to process any excess since it’s past April 15. I have over $2200 in excess. Researching the potential tax consequence, it appears there would be a double taxation on the excess. Various articles and resources also talk about a 6% penalty per year being assessed for each year the excess remains in the account. Can someone please clarify this?

Quoting one of the articles from a CPA’s website below-

“The penalty for excess contributions is 6%. If you remove the excess amount prior to the end of the tax year, you will not be assessed a penalty. In other words, there is good news in that you might have a chance at avoiding this 401(k) penalty if you get the excess contribution out of your account before the tax deadline for the year it was contributed.”