Roth 401k rollover to Roth IRA and excess contributions

[Dan99]

In 2019 I contributed to a Roth 401k through a prior employer.  I left the employer in December 2019 for a new opportunity. In January 2020 I rolled over the money from the Roth 401k account into an existing Roth IRA account (direct rollover, trustee-to-trustee).

When I received my 1099-R forms for the 2020 Roth 401k to Roth IRA rollover - I received two separate forms one with a code 8 in box 7 and one with a code H in box 7.

8 - Return of contribution taxable in 2020

H - Direct rollover of a designated Roth

I have followed up with my former employer and they have informed me that their 401k plan in failed their plans non-discrimination testing in February 2020 (after I had already rolled over my 401k) as part of their 2019 plan year end testing. For the plan to remain qualified / compliant they needed to return some of the employee contributions.

Since my Roth 401k contributions had already been rolled over to my Roth IRA - there were no funds to return to me.  I was never notified of the plan testing error or that some of my contributions had been reclassified as excess contributions.  When I received my 1099-R a portion of the funds had been classified with code 8 to indicate that the funds were not eligible to be rolled over.

I have done some research but am still trying to understand the proper tax handling in this situation and the right way to resolve this situation.

Can anyone help clarify the right way to handle this situation?

1. From what I have read it sounds like I need to work with my former 401k provider to understand what portion of the amount that was supposed to have been returned to me was from a Roth 401k contribution and what portion was earnings on top of the Roth 401k contribution.   

2. From what I understand if my Roth 401k contributions were classified as excess contributions due to a plan non-discrimination test failure - those after tax  Roth 401k contributions should be returned to me and should not be taxable.  From what I understand the portion that is returned that is earnings on that Roth 401k contribution would be taxable (and possibly would have a penalty charged on top of that as well)

 
3. From what I understand if I provide my current Roth IRA provider information regarding the amount of my Roth contribution and the amount that was earnings on the Roth contribution that was classified as an excess contribution - they should be able to distribute those funds to me.

I want to make sure that I'm not being taxed twice (unnecessarily) on the original after tax IRA contributions -and I want to make sure I'm not being taxed twice by the IRS - once for these 2020 1099-R documents that indicate that I had excess contributions from my old 401k and then a second time in 2021 when I receive the excess contributions from my current IRA provider.

Thank you in advance for any insight or advice that you can provide.

[dmertz]

1. and 2.  It's likely the case that the amount in box 1 of the code 8 Form 1099-R is the sum of the excess contribution and the attributable gains.  If so, I would expect the taxable amount in box 2a would represent just the taxable gains earned while the excess was in the Roth 401(k).  But yes, it would be good to confirm that with the plan administrator.

3.  The amount that had to be treated as a return of contribution from the Roth 401(k) due to failing the non-discrimination testing and was not eligible for rollover is now an excess contribution to the Roth IRA, at least to the extent that it exceeds what you could treat as a regular Roth IRA contribution for 2020.  Assuming that you treat the entire amount on the code 8 Form 1099-R as an excess in the Roth IRA, you must obtain from the Roth IRA a return of contribution (not a regular distribution) of the excess.  It often takes a bit of effort to explain to the Roth IRA custodian how this came to be an excess contribution instead of an eligible rollover contribution so that they will actually perform a return of contribution.  Once convinced, they distribute the amount to be returned, adjusted for any investment gain or loss, reported on a code JP 2021 Form 1099-R.  Any gains included with the returned contribution will be subject to tax and to early-distribution penalty on your 2020 tax return.

Odd that the code 8 Form 1099-R does not also have code B if the distribution of the excess in the 401(k) plan was in the designated Roth account.  Code 8 by itself would suggest that the excess was instead distributed from the traditional account in the 401(k), which doesn't seem to make sense unless you contributed both elective deferrals and Roth contributions to the 401(k) from your pay.  Does the code 8 Form 1099-R show the same amount in box 2a as is in box 1?

[Dan99]

Thank you for the fast and detailed response. On the 1099-R the Box 7 only contains a code of 8 and both box 1 and box 2a reflect the same amount.  All funds in the 401(k) were contributed as Roth contributions using after tax dollars in 2018 and 2019.  There were no employer funds or employer matching funds, and there were no traditional funds contributed to the 401(k).

I have printed out my final payroll stubs from both 2018 and 2019 that show that the full amount contributed YTD for the year were all Roth contributions.  The Roth 401(k) funds when rolled over were all rolled into my Roth IRA (there were no traditional funds in the 401(k) account).

I have been working through the HR department of my former employer who has been working with their contact at the 401(k) provider (the 401(k) provider said that I needed to work through the employer) - and it has taken 3 weeks of back and forth to even receive an explanation of why the 1099-R was classified the way that it was.  If I am understanding your response properly it sounds like I should be requesting a corrected 1099-R with the following changes:

Box 7 likely should be coded as 8B indicating that it is a excess contribution to a Roth 401(k).  Both 1 should reflect the total amount that needs to be distributed (excess contribution and attributable gains) while box 2a should only include the attributable gains.

Thank you again for your insight and help.

[dmertz · Accepted solution]

If all of your contributions to the 401(k) were Roth contributions and there were no employer matching or profit-sharing contributions which would have been made to the traditional account in the 401(k), that code 8 Form 1099-R is simply wrong and needs to be corrected by the plan administrator.  That form should have codes 8 and B, and the only amount that should be in box 2a is the amount of taxable gains, that are part of the gross distributed from the Roth account in the 401(k).

Yes, a proper correction would be for the plan to issue a corrected code 8 From 1099-R showing $0 distributed and a new code 8B Form 1099-R showing the gross distribution in box 1 and the taxable gains in box 2a.

You understand this better than most in a similar situation who post here and seem to understand it better than the HR department and plan administrator.

[Dan99]

Thanks again for the excellent and thorough response. 

This gives me renewed confidence to further escalate the issue with either the former employer or the 401(k) provider or both and a clearer description of what the proper (corrected) 1099-R forms should look like.

Your original post was helpful as well. I did talk to a department at my IRA provider this afternoon that specializes in distribution of excess contributions and they will be providing me with the paperwork / forms that are required to start the process on their end once I get the corrected 1099-R forms from the 401(k) provider.

[jaymax69]

Very similar situation in my case except I overcontributed to the ROTH 401k by mistake (after deducting payroll taxes I was 3800 short).   This excess got rolled over into a ROTH IRA when TD Ameritrade stopped supporting them.

1: Do I pay income taxes on the excess contributions and earnings before the Rollover in 2022 or not until I take a distribution this year (trying to do this ASAP)?

2: If I have to pay excess contributions and earnings as income tax for 2022 am I still considered to have an excess contribution in the ROTH IRA or is that already satisfied by the income tax paid thus avoiding an additional 6% excise tax.

[dmertz]

@jaymax69 , your situation appears to be a bit different because in Dan99's case the excess was reported as a corrective distribution from the 401(k).  In your case it's too late for that kind of a corrective distribution.  The only similarity is what happens when an amount ineligible for rollover ends up in a Roth IRA.

I've addressed your situation here:

https://ttlc.intuit.com/community/retirement/discussion/roth-401k-to-roth-ira-rollover/00/3125062