401k rollover

[PJB55]

My wife changed employers in 2023 and rolled her 401(k) to a new employer's plan the same year.  The previous Administrator later notified us (on 2/22/24) that she had excess 2023 contributions under their plan because the ratio of HCE and NHCE was non-compliant.  Even though the excess amount was completely transferred to the new plan as part of the original rollover, the old plan sent us a revised 1099-R showing the corrected amount that should have been rolled, and another 1099-R showing the excess amount as untaxed distribution income in 2023.  Meanwhile, the new Administrator has just been made aware of this situation, and they say that because the 2023 excess was initially sent to them as part of the original rollover, they will refund us the excess amount and it then has to be reported as income to us in 2024.  This can't be right; we should not be taxed on this amount in 2 different years.  Can somebody shed some light on this for me?  Who is correct and how do I report this for 2023?  We have not yet been refunded by either plan. 

[DanaB27 · Accepted solution]

What is the code in box 7 for the 2023 Form 1099-R for the returned excess deferral? Is 8?

You must include the excess deferral in your wages on line 1h of Form 1040 in the year the excess deferral happened, in your case in 2023. And you only need to do this once. 

I assume the new Administration will issue a 2024 Form 1099-R with code P.  If your reported the excess deferral on your 2023 return then you can ignore this form.

Earnings on the excess deferral will have to be reported in the year they were distributed and should be reported on a Form 1099-R with code 8.

Please see Pub 525 for additional information.

Another option to add the excess deferral to your wages in TurboTax without entering Form 1099-R:

1. Login to your TurboTax Account 
2. Click "Wages & Income" (under Federal) on 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".

[PJB55]

Yes, our 2023 1099-R shows code 8, and we will report this on our 2023 return.

For 2024, code P is the key!  I wish one of the plan administrators had told me this, we could have saved a lot of time and trouble.

Thank you so much for this answer, it makes perfect sense, and I can stop worrying about it now.