Are my excess 401K contribution calculations are correct?

[rrudra]

I changed companies in 2020 from company 1 to company 2.

My 401K contributions are as follows:
From company 1: $1,459.32 (In 2020 tax year)
From company 2: $19,500.00 (In 2020 tax year)

Received a check for $2,169.23 (that includes both contribution + interest) from company 2 in February 2021 (Prior to March 1st, 2021)

Questions:
1) Company 2 did not send me updated W-2. Did the company 2 do the right thing by not sending out updated W-2?
2) Since my over contribution is $1,459.32. Am I correct in that this amount should be added back to 2020 taxable income?
3) The interest on over contribution is $2,169.23 - $1,459.32 = $709.91. Am I correct in that this amount should be added to 2021 taxable income?

[rrudra]

I received more detailed letter from my current companies' 401K plan administrator, basically asserting what I asked above is correct and it is detailed again below:

1) $1,459.32 is reportable in 2020 as excess deferral contribution.

2) $709.91 is reportable in 2021 as earnings on the excess deferral contributions.

[DanaB27]

Yes, you are correct $1,459.32 is reportable in 2020 as excess deferral contribution and the $709.91 is reportable on your 2021 tax return as earnings on the excess deferral contributions.

 Please follow the steps below to enter this on your 2020 tax return:

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 "2020 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

Please note for the Tax Year 2021 tax filing due April 15, 2022: 

2021 Forms 1099-R will be issued reporting the excess.

• Form 1099-R with code P in box 7 can be ignored if you reported the excess as described above in 2020. 
• However, the earnings on Form 1099-R with Code 8 in box 7 should be reported in 2021.

[vb2k]

I have the exact same situation as @rrudra but there are federal and state taxes withheld for my excess return and earnings. My excess contributions was $4500 and earnings $900. Federal tax withheld on excess contribution was $400 and state tax withheld was $100. Similarly for the earnings federal tax withheld was $100 and state was $25.

I followed the steps described above and entered the excess contributions on "Any Other Earned Income" as"2020 Excess 401(k) Deferrals". The increased the tax I owe to IRS. But there are taxes already withheld for this amount. How do I enter those withheld tax amounts ? 

[DanaB27]

If you received the distribution in 2021 you will get a 2021 1099-R with code P for the excess and a 1099-R with code 8 for the earnings. Check box 4 and box 14 for the withheld taxes. Taxes are applied towards your 2021 tax return and not the 2020 tax return since the distribution and the withholding of taxes was in 2021.

If the 1099-R with code P has the taxes withheld, then you will also have to enter the 1099-R with code P on your 2021 tax return to get the taxes applied towards 2021. TurboTax will ignore the income from the 1099-R with code P but will apply the taxes withheld towards any balance due on your 2021 tax return.

[test29]

Dana, thanks for the detailed explanation; is there a reason/logic behinds that one pays tax for 2020 excess contribution on 2020 tax year (in 2021 april) while pays tax for 2020 earning from excess contribution on 2021 tax year ( in 2022 april)?  Why not pay both on 2020 tax year in 2021 april?

[macuser_22]

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@test29 wrote:

Dana, thanks for the detailed explanation; is there a reason/logic behinds that one pays tax for 2020 excess contribution on 2020 tax year (in 2021 april) while pays tax for 2020 earning from excess contribution on 2021 tax year ( in 2022 april)?  Why not pay both on 2020 tax year in 2021 april?

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Because tax law says that the tax on the excess contribution must be paid in the tax year that the excess occurred (it was deducted from your W-2 box 1 income for that year so you must replace it), but it continued to earn  interest (earnings) until removed so the earnings are taxed in the year actually returned.

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

[test29]

@macuser_22 oh that actually makes sense after your explanation! Appreciate it! Basically the excess part is from 2020 income while the earning is not realized until withdrawing which is in 2021 thus paying the earning in 2021 tax year which is in 2022 April.