Consequences of an excess deferral to a Roth 401k or 403b

[Opus 17]

I'm reasonably familiar with the tax consequences of not removing an excess deferral to a pre-tax 401k or 403b.  But what happens if the deferral is to a Roth account?  It's not added back to taxable income, because a Roth deferral was already taxed.  And Roth 401k withdrawals are not taxed (after age 59-1/2) anyway so I'm not paying tax twice, as with a pre-tax plan.  So what, if any, are the consequences of not removing the excess deferral?

[SusanY1]

While you pay tax twice when you remove an excess contribution of pre-tax deferrals, you pay it only once when the distribution is from a Roth 401(k) or 403(b).  You won't pay tax in both the year of the excess contribution and the year of distribution, but only in the year of the distribution.  You will also pay tax on any distributed earnings.  So while a normal distribution from a Roth 401(k) or 403(b) is not taxed at distribution at all, an over contribution is taxed in the year received.  

[dmertz · Accepted solution]

Excess designated Roth contributions are indeed taxed twice if not timely corrected.  While the excess Roth 401(k) or Roth 403(b) contribution does not get taxed on the tax return for the year of the contribution since they are after-tax contributions, if not corrected by April 15 of the following year the distribution from Roth of the excess and the attributable earnings are taxable no matter when they are later distributed, subject to the normal limitations on distribution of elective deferrals, despite the fact that the distribution is from a Roth account.

CFR 1.402(g)-1(e)(8)(iv) regarding distributions after the correction period:

(iv) Distributions of excess deferrals from a designated Roth account. The rules of paragraph (e)(8)(iii) of this section generally apply to distributions of excess deferrals that are designated Roth contributions and the attributable income. Thus, if a designated Roth account described in section 402A includes any excess deferrals, any distribution of amounts attributable to those excess deferrals are includible in gross income (without adjustment for any return of investment in the contract under section 72(e)(8)). In addition, such distributions cannot be qualified distributions described in section 402A(d)(2) and are not eligible rollover distributions within the meaning of section 402(c)(4). For this purpose, if a designated Roth account includes any excess deferrals, any distributions from the account are treated as attributable to those excess deferrals until the total amount distributed from the designated Roth account equals the total of such deferrals and attributable income.

The problem with enforcement is that the plan might not know that there is any excess contribution subject to such taxation.  Even though the IRS receives information sufficient information to know that an excess contribution has been made, it's likely that the fact that the distribution is taxable will need to be self-reported.

[Opus 17]

Interesting.  So it's taxable by code, but unlikely to be enforceable most of the time?

[Opus 17]

Is there even a form to report this?

[dmertz]

Unless the plan knows about the excess Roth contribution and tracks that and attributable earnings, which seems relatively unlikely, the plan will just report the distribution as an ordinary distribution and the recipient would probably need to submit a substitute Form 1099-R (Form 4852) showing the correct taxable amount and providing a place for explanation.