Excess Deferral (contribution) to 401k for 2019, but it's now 2022.

[f404]

This post is about an excess deferral (contribution) to my 401k retirement accounts in 2019.

It is now January 2022. I am doing my taxes for 2019 now, but have not yet filed (I made big tax payments before so the IRS actually owes me money, so I'm filing to collect the refunds).

In 2019, I switched jobs and contributed too much money to my two 401k accounts. The IRS limits for contribution to 401k for 2019 per individual was $19,000.

• At job 1, I put away $8,750 into the 401k.
• At job 2, I put away $19,000 into the 401k - I was never asked by my new job about previous 401k contributions that year, nor did I tell them that info.

I discovered this mistake when I started doing my taxes in January 2022.

• I contacted Fidelity, but they replied that IRS rules do not allow them to return the excess deferral since it's past April 15, 2020.
• I have not yet filed my 2019 return, I'm doing it now using TurboTax 2019 Home and Business.
• Based on other posts on this forum, I added the excess deferral of $8,750 as Other Earned Income and labeled it as "2019 Excess 401K Deferrals".

My questions:

• What are my options and what is the best course of action to take to minimize headaches and penalties?
• If I'm not allowed to return the excess deferral, what are my options?
• Do I leave it in the retirement fund and apply it to subsequent years (2022 for example)?
• I keep reading about 1099-Rs but haven't received anything
• I also read that IRS charges 6% penalty of the excess amount per year and also if you distribute it 10% penalty.
• Can someone please recommend best course of action using Turbotax?
• I'm trying to find a tax advisor to help with this, but don't know where to even start looking. Any thoughts?

[DianeW777 · Accepted solution]

Please review the answers after each question you asked below.  

1. What are my options and what is the best course of action to take to minimize headaches and penalties?
   • You must report the excess contribution as income (part of your wages for the second employer) on the 2019 tax return.  The W-2 is correct because 2019 is over and can not be retroactively changed to add income that was not taxed at the time.  

   1. You should report the excess contributions on Line 1 of your 2019 Tax Return by following these steps:

   2. Login to your TurboTax Desktop Account (TurboTax Online is available for current year only).
   3. Click "Federal" from the left side of your screen
   4. Scroll down to "Less Common Income" and click "Show More"
   5. Select "Miscellaneous Income" and click Start or Update
   6. Select "Other income not already reported on a Form W-2 or Form 1099" and click on Start
   7. Answer the Question "Did you receive any other wages?  Yes
   8. Click "Continue" through the questions until you get to "Any Other Earned Income"
   9. Answer "Yes" to "Did you earn any other wages?
   10. Indicate "Other" as Source of Other Earned Income and click Continue
   11. For the description enter "2019 Excess 401K Deferrals" and click on Done
2. If I'm not allowed to return the excess deferral, what are my options?
   • Under IRS Employee Plans Compliance Resolution System (EPCRS), these excess deferrals are still subject to double taxation; that is, they're taxed both in the year contributed to and in the year distributed from the plan.
     • IRS 401(k) Fix-it Guide
3. Do I leave it in the retirement fund and apply it to subsequent years (2022 for example)? 
   • Yes, you will pay tax on this amount again when it is distributed. Because this occurred due to two different employers, the IRS recognizes that each employer would have no knowledge of the other's plan contributions.
4. I keep reading about 1099-Rs but haven't received anything.
   • A Form 1099-R is received only when a distribution is taken from your 401(k).
5. I also read that IRS charges 6% penalty of the excess amount per year and also if you distribute it 10% penalty.
   • The 6% excise tax does not apply in this situation if you are not considered a "highly compensated employee".
   • Any distribution from your 401(k) before you reach age 59 1/2 years of age will be subject to a 10% premature distribution penalty. There are a few exceptions and you can refer to the link below for both issues.
     • IRS Exceptions to Tax on Early Distributions 
6. Can someone please recommend best course of action using TurboTax?

   • You should report the excess contributions on Line 1 of your 2019 Tax Return using the steps above.

7. I'm trying to find a tax advisor to help with this, but don't know where to even start looking. Any thoughts?
   • Yes,  You can choose to use TurboTax Live with one of our experts.

Finally, it would seem that if you requested a distribution of an excess contribution the plan administrator should comply with your request.  If you do take a distribution of the excess be sure to include the earnings on that amount.  Your plan administrator can calculate that amount for you. At that time you would report the income using the Form 1099-R that you would receive.  

• This publication will also be useful: IRS Publication 560 (page 17, has not been updated to 2021 as of yet).

NOTE:  TurboTax will alert you to the fact that you have an excess contribution to your 401(k), and provide a way to enter via Form 1099-R, but you will not be getting that form as we have discussed so be sure to follow the steps above to include that excess.

@f404

Thanks @Opus 17  for the assist.

[Edited: 01/03/2022 | 9:35PM PST]

[Opus 17]

The very simple answer is that it is over and done with, you are stuck with a result, and there is nothing you can do about it.

You must report the excess deferral on your 2019 tax return. Because the deferrals were reported on your W-2s, this should already have been done for you by your tax preparer or by the software that you used in 2019.  Check to see if the line 1 taxable wages are equal to the total of your two box ones from your W-2s, or is more than your box 1 total by the amount of the excess.

then, there is nothing else you could or can or should you do. You will pay income tax on the total amount of any withdrawals you make. If you make withdrawals before age 59 1/2, or before age 55 if you’ve separated from service, you will also pay a 10% penalty. There are no ongoing penalties (you may have been reading about a Roth IRA) and there is no way to make a corrective distribution.

[f404]

Thank you @Opus 17 and @DianeW777 for your thorough and quick answers! Really appreciate it.

• I have not filed my 2019 taxes yet - I'm doing that now using TurboTax Home and Business 2019 for Windows.
• TurboTax did detect the excess deferral to my 401k and alerted me with a warning.  I did not follow their help instructions on how to make the changes.
• Instead, I followed the instructions from @DianeW777 and others from threads like (https://ttlc.intuit.com/community/taxes/discussion/excess-deferral-to-401k-for-2019-taxes/01/1258128) so now the extra $8,750 is part of line 1 (wages) on my 1040 for 2019.
• I also called the IRS this morning and this is my understanding of the conversation I had with them:
  • The agent referenced Pub 525 for year 2019, starting on Page 10.
  • I mentioned this link to the agent: https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-exceeded-code-402g-li... but he said that was geared towards the employer sides of things, not employees and didn't apply to individuals.
  • The excess deferral needs to be on line 1 of 1040 as wages (since that's what that money was). I've done that by including it on line 1 of my 1040 as per above instructions.
  • The agent said it should not be taxed when doing a corrective distribution since you'll be paying taxes on it in 2019 and these are wages that should not have been in the 401k to begin with, so it's treated as wages. Also there won't be any penalties since it's wages.
    
  • But you will pay income taxes on the earnings from it when distributing it.
  • The above two bullet points made sense to me, but based on the information in this thread from @Opus 17 and @DianeW777  and other threads I've read, it sounds like I may actually be paying income tax on it in 2019 and then again when I get it distributed to me. Which is correct?
  • @Opus 17there's no way for me to do a corrective distribution? Is that the same thing as Fidelity telling me that they are not allowed to Return of Excess because it's past April 15, 2020? IRS agent did mention that I could take a "corrective distribution" and would not be taxed twice on it sine I will be paying taxes on the $8,750 wages in 2019.
  • According to the IRS definition of "highly compensated employee" (https://www.irs.gov/retirement-plans/plan-participant-employee/definitions), I may actually be, because for job 1 I worked for several years and was making more then $125,000 in 2018 (preceding year). So will I be charged 6% penalty per year and then in 20 years when I retire, I'll be screwed?
  • How do I take that $8,750 money out of my 401k, if not with a correct distribution, then what? Is that advisable? I'm really concerned about the 6% per year.

Really appreciate your insights - every day I learn something new from you all!

[Opus 17]

@f404 

The deadline to make a corrective distribution for 2019 deferred wages was April 15, 2020.  Although this IRS document is an audit guide rather than an instruction, it contains the same information.

https://www.irs.gov/retirement-plans/consequences-to-a-participant-who-makes-excess-deferrals-to-a-4...

Since you can't make a corrective distribution, the excess deferral is taxed on your 2019 tax return AND your withdrawals will be taxed, you do not get a basis in the 401(k).  In this way, a 401(k) plan is quite different from an IRA, where making non-deductible contributions gives you a basis in future withdrawals. 

Please tell me where you are seeing a 6% additional penalty in reference to a 401(k) excess deferral.  This is subject to much confusion because IRAs have a 6% penalty for excess contributions but a 401(k) is not an IRA, they are covered under completely different tax codes even though their overall purpose is similar.  I see several internet articles (and even a few other answers on this forum, unfortunately) that get the two confused.   Further, the rules that limit deferrals by "highly compensated employees" apply to the plan, not to the individual.  The plan may be required to return your excess contributions if you are subject to a reduced limit as an HCE, but that burden is not on you.  There is no additional 6% penalty for uncorrected excess deferrals as far as I can tell.  If there was, it would be calculated on form 5329, which does not have a section for excess deferrals to a 401(k).  @dmertz is my go-to expert, in case they want to weigh in further. 

https://www.irs.gov/pub/irs-pdf/f5329.pdf

Remember that excess contributions to an IRA are covered by completely different rules than excess deferrals to a 401(k).

Bottom line: it is too late to make a corrective distribution for 2019.  The excess deferral is added to your box 1 taxable wages and you pay income tax on it.  There are no further taxes or penalties.  Then, when you withdraw the money in retirement, all your distributions will be subject to regular income tax, even though a portion of your contributions were already taxed.

As to how to report the excess deferral on your 2019 tax return, print your return before you file and double check.  I would expect that turbotax would advise you to take a corrective distribution before April 15, 2020, and if you indicate you can't or won't do it, turbotax would automatically add the income to line 1.  Therefore, I expect that adding more income to line 1 will result in a double entry.  I may be wrong about how Turbotax works in this situation.  So, before you mail your return, print it and review it carefully, and make sure that the total taxable income on line 1 is correct; it should be job 1 plus job 2 plus the excess deferral, but the excess deferral should not be doubled.  

[Opus 17]

@f404 

And in any case, you would not be considered an HCE for 2019, because that is based on what you were actually paid, and not your annualized income.  

[f404]

Thank you @Opus 17 for the further clarification! I've learned a lot today from this thread! Happy New Year to you and @DianeW777 !

[Driley73]

I do not believe that is necessarily true. I am stuck in a similar quagmire, with the added complication that I closed out the errant 401K after I left that employer and rolled the entire 401K amount (much more than the excess deferral) into my rollover IRA at Fidelity. What I was told by the former employer is that the definition of a HCE is based upon the employee's income from the prior tax year, in this case 2018.