topic 401k refund after plan failed discrimination test in After you file

401k refund after plan failed discrimination test

rainflower4606 — Mon, 12 Apr 2021 17:41:32 GMT

I have already filed my taxes for 2020, but then later in March, I received a refund from my 401k because I was told my company's 401K plan failed the discrimination test. My question is: should I file an amendment for 2020 (because this was for the 2020 retirement contribution), or should I report this on 2021 (because this was distributed to me in 2021, and the 1099 will not be generated until 2021)?

I'm getting conflicting answers. My plan administration is saying I should file it for 2020, but when I called the 401K brokerage company, they tell me I should file it for 2021.

Re: 401k refund after plan failed discrimination test

DavidD66 — Mon, 12 Apr 2021 22:26:51 GMT

Reporting excess salary deferrals (excess 401k contributions) returned to you after the end of the tax year but by April 15th of the following tax year on your 1040. Do not create your own 1099R for this situation.

Any excess 401k contributions returned before the end of the current tax year should be covered in a 1099R from the 401k for the current tax year and entered as a 1099R in Turbo Tax.

Page 10 of IRS Pub 525 under Excess deferrals (the IRS term for 401K contribution is deferral) tells us to include the excess deferrals as income on line 7 of Form 1040 if the money was returned after the end of the tax year but by April 15th of the following tax year. You need to report only the excess contribution, not any money generated by the investment of the excess contribution. What you earned will be covered by a 1099R for the following tax year and will be entered then as a normal 1099R.

Below is how to do this in TurboTax Online:

Click on Federal
Click on Income & Expenses
Scroll down to the bottom of the page for "Less Common Income"
Click on "Show more"
Select Miscellaneous Income and click Start or Update
Select "Other income not already reported on a Form W-2 or Form 1099" and click on Start
Answer the Question "Did you receive any other wages? Yes
Click through the questions till you get to Any Other Earned Income
Answer Yes to "Did you earn any other wages?
Indicate "Other" as Source of Other Earned Income and click Continue
For the description enter "2020 Excess 401K Deferrals" and click on Done

Re: 401k refund after plan failed discrimination test

rainflower4606 — Tue, 13 Apr 2021 04:04:09 GMT

Thank you for the reply. I was just reading the IRS 525 document page 11 per your suggestion, and on column under excess contributions, it says:

Excess Contributions
If you're a highly compensated employee, the total of your elective deferrals made for you for any year under a section 401(k) plan or SAR- SEP plan may be limited by the average defer- rals, as a percentage of pay, made by all eligi- ble non-highly compensated employees.
If you contributed more to the plan than al- lowed, the excess contributions may be distrib- uted to you. You must include the distribution in your income as wages on Form 1040 or 1040-SR, line 1.
If you receive a corrective distribution of ex- cess contributions (and allocable income), it's included in your income in the year of the distri- bution. The allocable income is the amount of gain or loss through the end of the plan year for which the contribution was made that is alloca- ble to the excess contributions. You should re- ceive a Form 1099-R for the year the excess contributions are distributed to you. Add the dis- tribution to your wages for that year.

It seems to say that I should put this distribution under the year of distribution which is for 2021, not for 2020. Am I correct in the interpretation? I am a highly compensated employee in this situation.

Many thanks.

Re: 401k refund after plan failed discrimination test

DavidD66 — Tue, 13 Apr 2021 21:43:55 GMT

That is correct. Since the plan failed the discrimination test (and therefore you are considered highly compensated), you will report it on 2021 tax return, and should receive a Form 1099-R for the distribution.

Re: 401k refund after plan failed discrimination test

chandragelli — Mon, 25 Oct 2021 01:37:02 GMT

I got the excess 401K money (from 2020 contributions) due to failed discrimination test after April 15th 2021.

Letter from T.Rowe Price mentioned, I will get 1099-R early next year (2022).

Should I report this money in 2021 tax returns or amend 2020 tax return?

Any advice is appreciated.

Re: 401k refund after plan failed discrimination test

Mike9241 — Mon, 25 Oct 2021 03:23:53 GMT

since they're issuing a 2021 1099-R (in 2022) the code on it will be 8 - return of contribution and earnings taxable in 2021

Companies who fail discrimination testing are required to refund excess 401 (k) contributions. According to the IRS, employees, whose company fails discrimination testing, will receive refunds that are taxable in the year the refund is received, not the year the contribution was made.