401k over contribution

[nkbhatt14]

Hello,

I just realized that I had increased my contribution limit to 19% late last year to reach max contribution limit and never changed it in 2020. So I have been contributing very high amount. I also learned that it’s a mistake as I will reach my max contribution limit soon and have to reduce my contribution for rest of the year but it also means that I can’t get the full company match which will be a loss for me. 

What are my options?

Is it possible to reduce my 401k pretax contribution balance by making an adjustment (don’t know the technical word) by payroll so I can contribute at least 6%(to get full company match) for rest of the year and don’t lose my employer match?

Should I continue to over contribute(reduce to needed 6%) rest of the year to get full company match and request return of an excess contribution with adjusted W2 next year?

or Should I not worry about the company match loss and reduce the contribution to max $19,500 in 2020?

Thanks!

[KathrynG3 · Accepted solution]

It depends on your plan details what options are available. I recommend contacting the plan administrator for advice. It would be important to pin down their correction timeline so that you have informed guidance for how to proceed with setting up distributions for the rest of the year, including any company match. 401(k) plan administrators are required to not let their participants over contribute by issuing a "corrective distribution" for any excess or they would be subject to an excise tax.

Regarding tax considerations, I think you are in a good position to correct this without incurring significant consequences because technically, the contributions are not yet an excess.

If the excess was kept in the account, any excess distribution will be included in your W-2 for 2020. Secondly, any income earned from an excess contribution would count on your the tax bill for the year the excess was distributed.

IRS Retirement Plans Information:

401(k) Overview

401(k) Plans

401(k) and Profit-Sharing Plan Contribution Limits

IRS Issue Snapshot - Consequences to a Participant Who Makes Excess Deferrals to a 401(k) Plan

IRS News Release -  2020 Contribution limit increase to $19,500; catch-up limit rises to $6,500

To report the excess 401(k) contributions and subsequent distributions, a 2019 plan excess distributed in 2020 is reported on line 1 of your 2019 Form 1040:

Follow these steps to do this in TurboTax Online:

• From the left menu, select Federal
• Wages & Income and scroll all the way down to Less Common Income and click Show More
• Miscellaneous Income, 1099-A, 1099-C and click Start
• Other income not already reported on a Form W-2 or Form 1099 and click Start
• Did you receive any other wages? Answer Yes and click Continue
• When you get to Any other earned income. Did you earn any other wages? Answer Yes and
• Enter Source of Other Earned income: select Other and click Continue
• At the Any Other Earned Income screen, for the Description, enter 2019 Excess 401(k) Deferrals and click Done.

Please note for the Tax Year 2020 tax filing due April 15, 2021: 

2020 Forms 1099-R will be issued reporting the excess.

• Form 1099-R with code P in box 7 can be ignored if you reported the excess as described above in 2019. However,
• Form 1099-R with Code 8 in box 7 should be reported in 2020.

(recapped and updated for 2019 this link: Excess 401(k) Contribution solution by Rachel_W) 

[Edited 4/7/2020 | 11:36 AM PST]

@nkbhatt14

[nkbhatt14]

thanks!