Excess 401K Contribution and 1099 R Code E

[zappohll]

Hi Everyone,

I would like some guidance on how to handle an Excess Contribution to my Self-Employed 401K.

In early April 2020, I inadvertently made an excess contribution of $5,000 to my self Employed 401K - Profit Sharing account for tax year 2019.   I filed my 2019 tax return on April 15th 2020.

Three weeks later, in May 2020, I discovered the Excess Contribution, and had the Plan Administrator make a withdrawal of the $5,000 plus $33 earnings under EPCRS program to correct the Excess Contribution.   I also filed an Amended 2019 tax return, indicating the $5,033 distribution, and paid the tax.

I just received a 2020 1099-R indicating the $5033 distribution in Box 2a, indicating that it is a Taxable Distribution.  Box 7 indicates correctly that this is a correction under EPCRS.

Since I filed an amended 2019 tax return, I have already paid the tax on the $5033.

The problem is that I now have a 2020 1099 R indicating  in box 2a that the $5033 is taxable in 2020.  I don't want to pay tax on the same $5033 distribution twice.

I checked with the 401K Brokerage, and they will not modify the 1099R to indicate this distribution was related to the prior tax year.

Any suggestions are greatly appreciated!

[dmertz]

Unfortunately, double taxation is the penalty for not correcting this with a return of excess contribution by April 15, 2020.

[zappohll]

Thanks, but that doesn’t sound right.   I haven’t read anywhere in the tax code about double taxation when voluntarily correcting an over contribution error.

[dmertz]

As far as I can tell from IRS Rev. Proc. 2019-19, only excess elective deferrals can be corrected by distribution.  Excess allocations (employer contributions) are instead to be held in a separate account in the plan to be allocated to participants in subsequent years and the excess is subject to a 10% excess contribution penalty on Form 5330 each year that any excess remains until the separate account is fully consumed.

Since there was a distribution, this apparently was a corrective distribution of excess deferrals.  Chapter 4 of IRS Pub 560 describes the taxation of a distribution of excess deferrals made after April 15 where it states that this is subject to double taxation.

Rev Proc 2019-19:  https://www.irs.gov/pub/irs-drop/rp-19-19.pdf

2020 IRS Pub 560  is presently only available in draft form:  https://www.irs.gov/pub/irs-dft/p560--dft.pdf

[zappohll]

Thanks for your response!

I was doing a bit more research since I posted the question.

I reviewed IRS IRC 402 (g) (2) (c).  https://www.law.cornell.edu/uscode/text/26/402

From the way I'm reading it, only the earnings ($33 in this case) should have been reported in 1099 Box 2a as taxable.

Thoughts??

[dmertz]

IRC 402 (g) (2) (C) does not apply because the distribution occurred after April 15.  See IRC 402 (g) (2) (A).

[zappohll]

Hi @dmertz 

Thanks for your response!

For the 2019 tax year, the tax filing deadline was extended from April 15th to July 15th, 2020. 

https://www.irs.gov/newsroom/payment-deadline-extended-to-july-15-2020

The extension is not just for filing, but also for making 2019 contributions to a 401K. (IRS Notice 2020-18)

Since the distribution occurred in May 2020, prior to the July 15th extended deadline for the 2019 return, wouldn't IRC 402 (g) (2) (C)  still apply in this case?

[dmertz]

Ah, you are correct.  The IRS provided additional clarification in Notice 2020-23 which references Rev. Proc 2018-58.  Rev. Proc. 2018-58 lists as a postponed action a corrective distribution under CFR 1.402(g)-1.

I mentioned earlier that I believe that a distribution under 402(g) is only permitted for an excess elective deferral, not an excess employer contribution.  However, you mentioned that the excess contribution was made to the "Profit Sharing account," so it's not clear to me if the excess was an excess elective deferral or was instead an excess employer contribution.  If it was an excess elective deferral, it should not have been corrected under EPCRS (code E) but instead should have been corrected by a return of contribution (code P).

If this was a distribution of an excess elective deferral, I would probably submit a substitute Form 1099-R (Form 4852) showing only $33 in box 2a and maybe code P in box 7.  You'll need to provide explanation as to why the Form 1099-R provided by the payer is wrong.

If this was an excess employer profit sharing contribution, based on Rev Proc 2019-19 it might not have been proper to have it distributed.

[zappohll]

Hi @dmertz 

This is really helpful!!

I'm going to circle back with the brokerage that holds the self-employed 401K, and see if they are willing to re-issue the 2020 1099-R based on the additional reference information you provided.

Very much appreciated!!!