Two sets of excess 401K refund

[bettyzhoumd]

I changed job in 2022 and found out I contributed too much in my combined 401K.

I first contacted my previous employer and was told I should contact my current employer. I then contacted my current employer and current 401K company to request excess refund. Now I'm shocked to receive two sets of excess 401K refund. One is from previous 401K company and another from current 401k company. The previous 401K company told me that my previous employer requested it but the amount is not the correct excess amount and I had no idea where they got that.

Should I ask the previous 401K company to void the refund since I didn't request it? If not, will that cause issues with IRS because I got two sets of excess refund?  On the other hand, both excess refund had hundreds of dollars loss due to recent down market. What should I do? 

[Anonymous_]

Stay tuned. I will page @dmertz.

[dmertz]

You'll need to contact the previous employer for an explanation.  It's possible that the distribution from the 401(k) at the previous employer has nothing to do with your reporting to them of excess elective deferrals to the two plans combined but is instead a distribution that was required because of the plan at the previous employer failing non-discrimination testing.

It's still possible, though, that the distribution made from the previous employer's plan was the result of you informing them of you having made an excess elective deferral.  Because of investment losses, the amount distributed as a corrective distribution of your excess elective deferral was required to be adjusted (downward) proportionate to the overall loss in the account.

I would expect both plans to report these distributions with a code that indicates that they are ineligible for rollover, but it seems like one of these (or at least a portion of one of these) could be treated as a regular distribution which is eligible for rollover since receiving both has brought you below the elective-deferral limit.  Taking this position and within 60 days rolling over the portion that was not required to be distributed could be problematic, though, because it would require that the IRS accept your explanation that this portion was actually eligible for rollover, despite the plan reporting otherwise.  Whether the IRS would accept this position is unknown.

[bettyzhoumd]

Thank you @dmertz @Anonymous_! I did confirm that the previous employer 401K refund was the result of compliance/non-discrimination testing. I guess it's just my luck and too eagle to do the right thing. :(

I think I'll cash the checks and not rollover any refund money. Both checks are marked not eligible for pre-tax rollover. One last question is how to report the following numbers on my tax return since I won't receive 1099-R until Jan 2024.

Excess contributions

Earnings/Loss

Taxes withheld (Federal Income Tax)

Thanks again!!!

[bettyzhoumd]

I'd like to rephrase my questions. I got two sets of excess contribution refunds. One was requested by myself with the exact amount over IRS limit. The other was from the result of non discrimination testing.

The problem is that the first refund has two numbers:  Excess Contributions, Earnings/loss

The second refund has three numbers: Excess Contributions, Earnings/loss, Taxes withheld

Should I treat those two refunds the same on my tax return? My understanding from the other postings is that I can report the Excess contributions on 2022 return, and report Earnings/Loss and Taxes withheld on 2023 return. Is that correct? It's very confusing. Please advise.

Thanks very much!

[dmertz · Accepted solution]

As I understand it, these distributions occurred in 2023.

With regard to the first case, the excess contribution is includible on your 2022 tax return which you can do by entering a code-P 2023 Form 1099-R into 2022 TurboTax with the excess amount shown in boxes 1 and 2a.  The earnings will be reported on a code-8 2023 Form 1099-R that you'll enter into 2023 TurboTax next year.

With regard to the second case, whether the excess is reportable on your 2022 tax return depends on how the plan will code the distribution on the 2023 Form 1099-R.  Code P would mean it would be reportable on your 2022 tax return like the first case.  However, I think it's more likely to be reported with code E which will mean that it's taxable on your 2023 tax return.  The earnings and tax withholding are reportable on your 2023 tax return and would be included on the code E Form 1099-R if that is how the corrective distribution is reported.