401(K) Excess Contribution and withdrawl

[anilhpatel]

Due to two employer I had excess contribution in to 401(K) plan in 2018. First employer did not had 401(K) Roth, but second employer had 401(K) pretax and ROTH. Excess contribution was $ 3,666.60 - $ ,833.30 pre tax and $ 1,833.30 ROTH I requested for excess removal before March 2019, but employer did not process until May 2019.  I reported $ 1,833.30 in 2018 as income. I did not report ROTH contribution as it was not included in W2 as taxable income.

1. For 2018 reported only $ 1,833.30 Pre Tax is correct or should have reported $ 3,666.60 (Pre tax and ROTH)?

I received 1099_R in 2019 for $ 3,989.78 ($ 3,666.60 plus $ 321.18 earning) is reported as Box 1 - Gross distribution and Box 2B- Taxable Amount, and no check on Box 2B. I called Fidelity so many times to show only pre tax as taxable and send me corrected 1099_R, but will not correct and not replying my written request.

2. Is all withdrawal pretax and ROTH and earning on ROTH is taxable, or only pretax and pretax earning taxable and ROTH and ROTH earning is not taxable? How much is taxable for year 2019? I have nit filed taxes yet and doing it now. 

How Do I report excess withdrawal portion of ROTH and earning on ROTH in turbo tax, if not taxable? 

Thanks

Anil Patel

[macuser_22]

What code in in box 7 on the 1099-R?

Did you receive a separate 1099-R with the $321 earnings in box 2a and a code 8 on box 7?

#1 - Sounds like you reported correctly in 2018 since the IRS instructions say NOT to include returned designated Roth contributions as wages.

#2

As the IRS instructions say, the returned contribution (other then designated Roth) must be added to wage for the tax year that the contribution was for, but the earnings must be reported as income in the tax year returned.   Per the instructions, that requires two 1099-R forms.

For information see IRS Pub 525 page 10
https://www.irs.gov/pub/irs-pdf/p525.pdf

[anilhpatel]

I received only one 1099-R, all # 3,987.78 in Box 1 and 2, and Code E on box 7.

Thanks for 2018 tax reporting answer, but I am working on 2019 Taxes and based on 1099_R, all becomes taxable income.  Fidelity will not correct 1099_R and I have been fighting for more than a year but no luck. I want to confirm if they are right as they included ROTH withdrawal and ROTH earnings on 1099_R as taxable. And if it should not be included how do I report only Pretax withdrawal and pretax earnings, and what to do with ROTH earnings?

[anilhpatel]

I forgot to mention that the adjustment of excess removal and earnings removal are equally removed from the account. 50% Pre Tax and 50% ROTH, per activity history and statement.

[macuser_22]

A code E (EPCRS) distribution under this circumstance (two employers) appears that it might be incorrect.   The code E is for plan errors committed but the plan trustee.    Elective employee contributions that are excess because of two employers are not plan errors - they are usually considered to be employee errors, however, if the employee wishes to treat it as a plan error then you report it differently.

The code E is explained in that same Pub 525 on page 11.

The box 2a taxable amount should be the earnings plus the before tax amount returned but not the after-tax Roth contribution.   In this case it is taxable in the year *returned* so you jumped the gun on your 2018 tax return by assuming that the employer would treat it as a excess deferral and not a plan error.    Since it is now taxable in 2019, it was not taxable in 2018 and the $ 1,833.30 should not have been added to income.    You can amend 2018 to get a refund of that tax paid and pay it now in 2019.

Quote from pub 525 page 11:

A corrective payment of excess annual additions
consisting of elective deferrals or earnings
from your after-tax contributions is fully taxable
in the year paid. A corrective payment consisting
of your after-tax contributions isn't taxable.

If you received a corrective payment of excess
annual additions, you should receive a
separate Form 1099-R for the year of the payment
with code E in box 7. Report the total payment
shown in box 1 of Form 1099-R on line 4c
of Form 1040 or 1040-SR. Report the taxable
amount shown in box 2a of Form 1099-R on
line 4d of Form 1040 or 1040-SR.

[anilhpatel]

Thanks.

I will file 2018 amended tax return and for 2019 will file as you mentioned, but confused for how much taxable. 

Should I report all $ $ 3,987.78 as reported in 1099_R , Box 2a, Taxable or if ROTH portion not taxable, how to deduct it from reporting?

Excess -

$1,833.30 Pre Tax 403(B)

$1,833.30 ROTH 403(B)

Earnings -

$ 160.59 Pre Tax 403(B)

$ 160.59 ROTH 403(B)

Received only one 1099_R with CODE E on box 7,. Box 1 and 2a have # $ 3,987.78 (which is pretax and ROTH excess and earnings on pre tax and ROTH).

Anil

[macuser_22]

I believe that your 1099-R is defective if the return consists of both a Traditional 401(k) contribution AND a 401(k) Roth contribution because those are two different accounts and a single 1099-R cannot do it two different ways for two different accounts.

Are you sure that they actually returned your Roth 401(k) contributions and did not just count it all as a Traditional 401(k) contribution as the single 1099-R indicates - do you have any documentation proof that the Roth contributions were returned?

The 1099-R instructions are clear as to how this should be reported.

https://www.irs.gov/instructions/i1099r

The instructions say for the non-designated Roth account:

[quote]

Because the distribution of elective deferrals (other than designated Roth contributions) is fully taxable in the year distributed (no part of the distribution is a return of the investment in the contract), report the total amount of the distribution in boxes 1 and 2a. Leave box 5 blank, and enter Code E in box 7.

For the designated Roth (401(k) Roth) it says:

[quote]

For a return of employee contributions (or designated Roth contributions) plus earnings, enter the gross distribution in box 1, the earnings attributable to the employee contributions (or designated Roth contributions) being returned in box 2a, and the employee contributions (or designated Roth contributions) being returned in box 5. Enter Code E in box 7.

The account trustee should issue corrected 1099-R's that follow the IRS rules.  The rules are clear that it requires two different 1099-R's if contributions for two different accounts was returned.

Note that I called it a 401(k) - the same applies to a 403(b).

[anilhpatel]

I know that 1099_R is defective and I called Fidelity so many times and wrote but will not correct as they have outsourced the department and only way I get answer is what is a note on the account. I have my activity and statements to show that distribution was 50% Pre Tax and 50% ROTH, and same for earnings. 

It should not have Code E but Employer did not work on the excess contribution problem and refund even though I reported in March 2019, before tax due date.  Employer sent forms to Fidelity and had a signature by non authorized person, so they covering employer and making hard for employee to figure it out. 

I don't want to over pay or underpay and tax liability and deal with audit or tax bill.

[macuser_22]

As I said before, I do not believe a code E is appropriate at all.  Code E is for a plan administrator to correct errors that the *plan* made that violates plan rules.   For example if the *plan* exceeded the yearly contribution limit for *that* plan.   In this case you exceeded the limit but having two employers each of which did not exceed the limit of the plan that they administrator.  They are not responsible for contributions to another employer plan.   That is why the IRS has a 1099-R with a code P & 8 to take care of that common excess deferral situation.   Actual plan error with a code E is very rare.

It would probably take too much explaining to try to switch to a code P on a substitute 1099-R at this point, but I would ignore the 1099-R that you have and enter two substitute 1099-R's (4852 form)  on the TurboTax 1099-R screen, and make then out as the IRS instructions say - that I posted above - with code E and the box 1 & 2a the same for the before-tax money and box 1 and 2a with only the earnings for the after-tax Roth and the Roth contributions in box 5.    TurboTax will ask for an explanation of why you are using a substitute and what steps you took to get the issuer to correct it.    Just explain as in this thread.

User @dmertz - do you have a different solution to this?

[dmertz]

macuser_22, I agree with your suggestions.