Exceeded 401k Contribution. What should I do?

[russelsp]

I have exceeded my 2019 401k contribution.  I have notified my employer and told me that they will do a withdrawal and have to issue a corrected W2.  However,  I don’t think they will be withdrawing the excess amount by April 15. I know I’ll be double taxed but would like to find out how to do my tax filing.  Is the bug when e-filing with this situation already resolved?  Thanks!

[MaryK4]

Whether or not your plan sponsor meets the 4/15/20 deadline, you need to include the excess 401(k) contribution to your wages on your Form 1040, using the instructions below.  

If the plan sponsor is unable to make the distribution by 4/15/20, you will end up paying taxes on the amount twice...first on your 2019 Tax Return and then again when you withdraw the money during retirement.  

You should not make any changes to your W2, it needs to be input exactly as it appears so that the IRS can match the information to your return.

You should report the excess contributions on Line 1 of your 2019 Tax Return by following these steps:

1. Login to your TurboTax Online Account
2. Click "Take Me to My Return"
3. Click "Federal" from the left side of your screen
4. Scroll down to "Less Common Income" and click "Show More"
5. Select "Miscellaneous Income" and click Start or Update
6. Select "Other income not already reported on a Form W-2 or Form 1099" and click on Start
7. Answer the Question "Did you receive any other wages?  Yes
8. Click "Continue" through the questions until you get to "Any Other Earned Income"
9. Answer "Yes" to "Did you earn any other wages?
10. Indicate "Other" as Source of Other Earned Income and click Continue
11. For the description enter "2019 Excess 401K Deferrals" and click on Done

If your Plan Sponsor ends up making the distribution by 4/15/20, you will receive a 2020 Form 1099-R in 2021 showing the refund with a code "P" in box 7 which you can ignore if the excess deferral is reported as suggested above.  However, the earnings will be reported on a separate 2020 Form 1099-R with a Code "8" in Box 7 that should be reported on your 2020 tax return.

[macuser_22]

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@russelsp wrote:

... have to issue a corrected W2. 

Is the bug when e-filing with this situation already resolved?  Thanks!

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The plan trustee must issue a 1099-R for the excess.  The W-2 is correct because 2019 is over and can not be retroactively changed to add income that was not taxed at the time.  You must add the income to the 1040 line 1 wages so that thet money that was not reported on the W-2 is now taxed.

There is no known bug in this area.  What bug are your referring to?

[awillis2]

Although a 1099R SHOULD issue from the employer when there are excess contributions, it is not uncommon for it to go unnoticed when the taxpayer changes jobs.

[bowhan0x]

Hello, thanks for the useful tips.

What if the 1099-R received next year has a code "E" instead of "P" in box 7. Can it be ignored as well? 

Thanks again!

[macuser_22]

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@bowhan0x wrote:

Hello, thanks for the useful tips.

What if the 1099-R received next year has a code "E" instead of "P" in box 7. Can it be ignored as well? 

Thanks again!

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Neithedr a code P or code E can be "ignored".  They both must be entered and any amount in box 2a will be taxable.

[bowhan0x]

Thanks for your response.  This is very useful. I have an additional question, if you can please instruct, I'd really appreciate it.

I played this a bit in turbotax and discovered that if code "P" is used, then there is no tax consequence (no tax for this 1099-R for 2021). However, when code "E" is used, then it appears that the amount on this 1099-R is taxable for 2021. 

When the excessive contritution was returned to me in Feb last year, I have in fact followed your instruction #2 from this thread and reported this income in 2020's return as misc income. My question is what should I do now to avoid being double-taxed.

I have found you mentioned code E in another thread but without mentioning any solution to avoid double-tax. And my over contribution was caused by two employers each of which contributed within limit.

Thanks a ton!

[macuser_22]

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@bowhan0x wrote:

When the excessive contritution was returned to me in Feb last year, I have in fact followed your instruction #2 from this thread and reported this income in 2020's return as misc income. My question is what should I do now to avoid being double-taxed.

There is no double tax.  It is NOT misc income.  You need to amend 2020 and remove the misc income for a refund of that tax.  It never should have been reported that way at all.  It is ONLY entered as a 1099-R.

[ja2001]

Hello,

I changed jobs mid year in 2021 and contributed extra in the 2nd job. 

I followed up with the 401k administrator of the 2nd employer to get the refund for the full amount of excess. 

Two questions

1) How do I report this when filing taxes in 2022 ?

2) They also took away the company contribution, said "Forfeited". Is that right ? where does that money go ? to the company ? the 401K administrator keeps it ?. Shouldn't I not continue to have that portion in my account.

Thanks

[MarilynG1]

There are two ways you can report this on your 2021 return. 

You can report the amount of the Excess Contributions under Miscellaneous Income as follows:

1. Click "Federal" from the left side of your screen
2. Scroll down to "Less Common Income" and click "Show More"
3. Select "Miscellaneous Income" and click Start or Update
4. Select "Other income not already reported on a Form W-2 or Form 1099" and click on Start
5. Answer the Question "Did you receive any other wages?  Yes
6. Click "Continue" through the questions until you get to "Any Other Earned Income"
7. Answer "Yes" to "Did you earn any other wages?
8. Indicate "Other" as Source of Other Earned Income and click Continue
9. For the description enter "2021 Excess 401K Deferrals" and click on Done

If you report the Excess Contributions in this way, when you receive a 2022 Form 1099-R from the plan administrator (which you may not get before tax filing deadline), you won't need to go back and amend your 2021 return; just keep it for your records.  

OR, not do anything with the Excess Contributions on your 2021 return; you will be charged a penalty.  Then, when you receive the 2022 Form 1099-R, you would need to Amend your 2021 return.

The amounts your employer contributed that were forfeited would have been returned to them.

Click this link for more detailed info on How to Report Excess 401K Contributions in TurboTax (change the years to 2021 and 2022). 

[jiweihe1223]

Is this reply still applicable for tax return 2021?
I over contributed to 401k in 2021 and am dealing with the same problem in TurboTax. 

Somehow TurboTax popup window says to report the excess deferral on your 2021 return in the Income section for Retirement Plans and Social Security whether or not you receive a form 1099-R before your return. Report the excess amount in boxes 1 and 2a and use code P in box 7. 

Is it OK to just report the excess deferral in miscellaneous income and ignore the above statement?

[macuser_22]

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@jiweihe1223 wrote:

Is this reply still applicable for tax return 2021?
I over contributed to 401k in 2021 and am dealing with the same problem in TurboTax. 

Somehow TurboTax popup window says to report the excess deferral on your 2021 return in the Income section for Retirement Plans and Social Security whether or not you receive a form 1099-R before your return. Report the excess amount in boxes 1 and 2a and use code P in box 7. 

Is it OK to just report the excess deferral in miscellaneous income and ignore the above statement?

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You do not need to wait for a 1099-R next year that will probably require you to amend your 2021 tax return to report the excess on line 1 of your tax return - it can be entered this way and then ignore the 2022 1099-R with a code P in box 7 when it comes.

There are two methods to do this (I prefer the 2nd method because many people make errors or get confused by the 1099-R interview):

1) Enter a 1099-R with the returned contribution amount (not including earnings) in box 1 & 2a, and a code "P" in box 7. When asked what year 1099-R say 2022.

or 2)
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 2021 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.

[Note: If there were any earning that were returned in 2021 then the earnings will be reported on a separate 2022 1099-R with a code 8 that goes on your 2022 tax return - do not enter the earnings here.]

Both methods will add the returned excess to your 2021 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.

For information see IRS Pub 525 page 10
https://www.irs.gov/pub/irs-pdf/p525.pdf

Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Include the loss as a negative amount on Schedule 1 (Form 1040), line 8 and identify it as “Loss on Excess Deferral Distribution.”

Enter as:
Miscellionious Income ->
Other reportable Income ->
Any Other Taxable Income (yes) ->
Description (enter "Loss on Excess Deferral Distribution" and amount as a negative number).

[jiweihe1223]

Thank you so much! It is clear. 

Also thanks for the information about loss at the end. I suspect there will be a loss to the amount of excess contribution considering the stock market lately. 

[jiweihe1223]

I have a follow-up question. What will happen to the company's matched amount? Will it be returned as earnings or will it be forfeited or will it stay in the account?

[DaveF1006]

Your company matched amount is not earnings. It stays in the account.

@jiweihe1223