Reporting 401(k) excess contribution without removing it

[seawa]

I changed my job in 2023 after making the maximum annual contribution to my pre-tax 401(k) account in the previous job ($22,500). In the new job, I contributed $10K more and that exceeded the annual limit. 

At first, I was planning to remove the excess amount from previous employer's 401(k) plan back to the allowed limit, however the plan administrator declined that request saying excess contribution wasn't their fault. The new employer can remove the contribution, but they would also remove their 100% match for the $10K contribution. Therefore, it seems like a better idea to pay the "penalty" rather than losing the generous match.

So my questions are:
1) How can I properly report the excess contribution in my 2023 tax return to pay the penalty without removing the excess contribution in the account? 
2) Will I have to keep track of this excess contribution until retirement, when I start getting money out of the 401(k) account? If so, what exactly do I need to track and does Turbotax help with it?

[DanaB27 · Accepted solution]

You do not pay a penalty for an excess deferral. But if you do not take out the excess amount by April 15th, then you are taxed twice on the excess deferral left in the plan. This happens once when you contribute it (with the steps below) and again when you receive it as a distribution (reported on Form 1099-R). You can't include the excess amount in the cost of the contract even though you included it in your income.

You must include the excess deferral in your wages in the year the excess deferral happened. 

1. Login to your TurboTax Account 
2. Click "Federal" from the left side of your screen
3. Scroll down to "Less Common Income" and click "Show More"
4. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
5. Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
6. On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
7. Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
8. On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
9. On the "Any Other Earned Income" screen enter "2023 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

Please see Pub 525 for additional information.

No, you do not need to keep track of it.