Excess deferral to 401k for 2019 taxes

[jackFF]

Thanks for your reply. I did choose the potion to Not enter anything in 2019. TT's instructions are all over the place and incorrect in some instances (1099R, option R...) I noticed that reporting the approximate 6K excess deferral (without gain) either in W2 or as 1099R netted me to pay an extra 2.9K or ~4(% tax on this amount... (!!!) This seemed fishy so I followed the recommendation from  Dave1006 and entered nothing in 2019 return (after all I did not see this $ in 2019 and will be taxed on it and profits for 2020 through 1099R in 2021.

[macuser_22]

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@jackFF wrote:

Thanks for your reply. I did choose the potion to Not enter anything in 2019. TT's instructions are all over the place and incorrect in some instances (1099R, option R...) I noticed that reporting the approximate 6K excess deferral (without gain) either in W2 or as 1099R netted me to pay an extra 2.9K or ~4(% tax on this amount... (!!!) This seemed fishy so I followed the recommendation from  Dave1006 and entered nothing in 2019 return (after all I did not see this $ in 2019 and will be taxed on it and profits for 2020 through 1099R in 2021.

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What year was the excess deferral for 2019?   What year was it returned - 2019 or 2020?

Assuming a 2019 excess and returned in 2020 then:

You do not need to wait for a 1099-R next year that will probably require you to amend your 2019 tax return to report the excess on line 1 of your tax return - it can be entered this way and then ignore the 2020 1099-R with a code P in box 7 when it comes.

There are two methods to do this (I prefer the 2nd method because many people make errors or get confused by the 1099-R interview):

1) Enter a 1099-R with the returned contribution amount (not including earnings) in box 1 & 2a, and a code "P" in box 7. When asked what year 1099-R say 2020.

or 2)
Excess 401(k) deferrals should be reported in:
(There are several screens to click through to get to the right place)

Miscellionious Income ->
Other Income not reported on a W-2 ->
Other wages (yes) ->
House Hold employee (Continue) ->
Sick Pay (Continue) ->
Other earned income (yes) (Includes excess salary deferrals)->
Source of income (other) ->
Any other income - enter the amount of the excess deferral and an explanation.

This will add the returned excess to your 2019 wages on line 1 exactly the same way that the 1099-R would. The only information that is sent to the IRS is the line 1 amount.

[Note: If there were any earning that were returned in 2020 then the earnings will be reported on a separate 2020 1099-R with a code 8 that goes on your 2020 tax return - do not enter the earnings here.]

Both methods will add the returned excess to your 2019 wages on line 1 exactly the same way that the 1099-R would. The only information that is sent to the IRS is the line 1 amount.

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

Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Include the loss as a negative amount on Schedule 1 (Form 1040), line 21, and identify it as “Loss on Excess Deferral Distribution.”

Enter as:
Miscellionious Income ->
Other reportable Income ->
Any Other Taxable Income (yes) ->
Description (enter "Loss on Excess Deferral Distribution" and amount as a negative number).

[aa51]

Thank you - this was really awesome.  I love the clear answer and detailed steps on how to enter it.  Its documented sharing of expertise like this that will keep me coming back year over year to Turbotax.

[aa51]

nice summary - I agree with your approach

[marty00]

Thanks, @macuser_22! 

Procrastination is never good but due to COVID and other issues, I started my taxes this 4th weekend as it usually relatively straightforward, so I thought!  Little did I realize that I contributed to my 401K in excess in 2019 due to a change in job and a bonus payment that came in later.   

I don't believe Fidelity will not be able to return the excess amount before July 15th (they have to snail mail the forms, yes in 2020!).  I will follow option 2 mainly because I won't have all the (accurate) info for1099-R.

While filing taxes for 2020 next year, I will ignore one of the 1099-Rs that I will receive. Hope my way forward is correct. Any other thoughts?    [I am responsible for my decisions but appreciate the guidance]. 

[macuser_22]

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@marty00 wrote:

Thanks, @macuser_22! 

Procrastination is never good but due to COVID and other issues, I started my taxes this 4th weekend as it usually relatively straightforward, so I thought!  Little did I realize that I contributed to my 401K in excess in 2019 due to a change in job and a bonus payment that came in later.   

I don't believe Fidelity will not be able to return the excess amount before July 15th (they have to snail mail the forms, yes in 2020!).  I will follow option 2 mainly because I won't have all the (accurate) info for1099-R.

While filing taxes for 2020 next year, I will ignore one of the 1099-Rs that I will receive. Hope my way forward is correct. Any other thoughts?    [I am responsible for my decisions but appreciate the guidance]. 

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You misunderstand.    You do not have until July 15 to remove the excess.   That date was April 15, 2020.    The IRS decision to delay tax returns to July 15 had no effect on the April 15 date to remove excess 401(k) contributions since that is codified in law and cannot be changed administratively.

Since is cannot be removed then it still must be taxed as an excess that can only be entered as below and must remain in the 401(k) as before tax money which means that when finally withdrawn to will be taxed again - that is the penalty for not timely removing it by Apr 15.    That is explained in IRS Pub 525 page 10.

You will not receive any 1099-R because it cannot be returned so you must report it this way on your 2019 tax return.

Miscellionious Income ->
Other Income not reported on a W-2 ->
Other wages (yes) ->
House Hold employee (Continue) ->
Sick Pay (Continue) ->
Other earned income (yes) (Includes excess salary deferrals)->
Source of income (other) ->
Any other income - enter the amount of the excess deferral and an explanation.

This will add the  excess to your 2019 wages on line 1of the 1040 as required.

[marty00]

Thanks, @macuser_22.  

I stand corrected and truly appreciate you taking the time to let me know. 

I will work with Fidelity to get the excess amount withdrawn ASAP (say it is taken care by Aug 2020). Then I am assuming they will then issue a 1099-R  (two of them one for the amount and the second one for the gain/loss). 

Am I interpreting it right that I have to now add the excess amount as you mention in my 2019 tax return and ALSO also pay tax again next year tax return (as the amount will be withdrawn in 2020)?  [Ignore the gain/loss for a moment]. 

Say the excess amount is $10,000 and I pay 20% taxes now, which is $2000  (to make the math easier).  When I withdraw and Fidelity issues the 1099-R, I will have to pay another $2000?  Plus factor in any gains/losses. 

Did I get that right? What if I don't do anything now and take care of it next year to avoid double taxation - maybe pay a small(er) penalty?   

Thanks!

[macuser_22]

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@marty00 wrote:

Thanks, @macuser_22.  

I stand corrected and truly appreciate you taking the time to let me know. 

I will work with Fidelity to get the excess amount withdrawn ASAP (say it is taken care by Aug 2020). Then I am assuming they will then issue a 1099-R  (two of them one for the amount and the second one for the gain/loss). 

Am I interpreting it right that I have to now add the excess amount as you mention in my 2019 tax return and ALSO also pay tax again next year tax return (as the amount will be withdrawn in 2020)?  [Ignore the gain/loss for a moment]. 

Say the excess amount is $10,000 and I pay 20% taxes now, which is $2000  (to make the math easier).  When I withdraw and Fidelity issues the 1099-R, I will have to pay another $2000?  Plus factor in any gains/losses. 

Did I get that right? What if I don't do anything now and take care of it next year to avoid double taxation - maybe pay a small(er) penalty?   

Thanks!

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You do NOT remove it at all.   If you do then it will be a taxable distribution and of you are under retirement age subject to a early distribution penalty.   Do not remove it until you retire and start taking distributions form yiur retirement account.  It would make no sense to take any distribution before then.

It can no longer BE removed as an excess deferral and unless your employers 401(k) plan allows early distributions before retirement they would not even allow you to remove it.

[marty00]

Thanks yet again, @macuser_22.

Now I (think) I got it! What you are saying is that just add to the income in Line 1 now (pay the taxes) and then don't do anything else in the subsequent tax returns, including asking Fidelity to return the excess (as it is already past April 15th). 

And whenever I chose to withdraw after retirement, I would be effectively paying taxes again on this amount as there will be no way to say that a certain portion was excess and taxes paid long ago. You just suck it up and pay it ... any gains (or losses) will be a factor in automatically as all the money is taxable anyway.

Hope my statements and interpretations above are correct. BTW, I read that paragraph again in Publication 525 page 10 and after reading your reply it makes more sense.

[ck128]

With 1 week to go we now need to consider the scenario that refund won't be issued or will be issued past 7/15, so most of the answers above won't apply.

What's being suggested of "do not take refund " directly contradict with the example TT gives in the software (READ last sentence of paragraph 1).   This is very confusing.

Also is the double tax scenario for past the tax deadline refer to:

1. Tax in 2019 for excess.  2. Tax again when retire and take distribution

OR

1. Tax in 2019 for excess  2. Tax again in 2020 because you got a refund 1099R from Fidelity as income.

Which of above is "Double Tax"?

"Example 2:
Assume same information as Example 1. But Jessica doesn't discover the overpayment until November 20, and she had already filed her 2019 return. She notifies the plan administrator immediately, and she withdraws the excess on December 5.

Jessica must pay additional taxes on the overpayment because she didn't withdraw the funds by April 15. She amends her 2019 return to report the overpayment as if she received Form 1099-R (same as Example 1) and pays the additional taxes.

On her 2020 return, Jessica enters the forms she received from the plan administrator. Only the earnings on the overpayment will be added to Jessica's 2020 income."

[ck128]

With 1 week to go we now need to consider the scenario that refund won't be issued or will be issued past 7/15, so most of the answers above no longer applies.

 TurboTax gave a clear example (READ last sentence of paragraph 1) that even past tax deadline, one can still request and get refund for the excess contribution.   

Does the double tax scenario mean you will be 

1. Taxed in 2019 for excess contribution by reporting income on Line 1.

2. Taxed again when retire and take distribution

But if you already took refund, then there is no more tax on that refunded amount.   What does double tax mean?

"Example 2:
Assume same information as Example 1. But Jessica doesn't discover the overpayment until November 20, and she had already filed her 2019 return. She notifies the plan administrator immediately, and she withdraws the excess on December 5.

Jessica must pay additional taxes on the overpayment because she didn't withdraw the funds by April 15. She amends her 2019 return to report the overpayment as if she received Form 1099-R (same as Example 1) and pays the additional taxes.

On her 2020 return, Jessica enters the forms she received from the plan administrator. Only the earnings on the overpayment will be added to Jessica's 2020 income."

[jackFF]

so what if I do NOT report it this year (per DaveF1006 post on 4/6/20) - even through I had the excess distributed before April 15?, and next year use the 1099R that will be issued - will I have to pay a penalty? Again,  I had ~6K that was distributed and TT calculations make me pay and extra 2.9K in taxes or ~50% of the 6K which seems completely out of wack and disproportionate...

[macuser_22]

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@ck128 wrote:

With 1 week to go we now need to consider the scenario that refund won't be issued or will be issued past 7/15, so most of the answers above no longer applies.

 TurboTax gave a clear example (READ last sentence of paragraph 1) that even past tax deadline, one can still request and get refund for the excess contribution.   

Does the double tax scenario mean you will be 

1. Taxed in 2019 for excess contribution by reporting income on Line 1.

2. Taxed again when retire and take distribution

But if you already took refund, then there is no more tax on that refunded amount.   What does double tax mean?

"Example 2:
Assume same information as Example 1. But Jessica doesn't discover the overpayment until November 20, and she had already filed her 2019 return. She notifies the plan administrator immediately, and she withdraws the excess on December 5.

Jessica must pay additional taxes on the overpayment because she didn't withdraw the funds by April 15. She amends her 2019 return to report the overpayment as if she received Form 1099-R (same as Example 1) and pays the additional taxes.

On her 2020 return, Jessica enters the forms she received from the plan administrator. Only the earnings on the overpayment will be added to Jessica's 2020 income."

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The "double tax" means  it must still must be reported wages in line 1 of the 2019 tax return because your employer deducted from wages on your W-2 so you must put it back as wages.

If not removed then it remains "before tax" money in the 401(k) so like all other 401(k) distributions it will be taxed when withdrawn as ordinal income.

When timely returned before April 15, then it still must be reported as wages on the 2019 1040  line 1, but it is gone from the 401(k) so to will never be distributed as taxable income.  When returned, the plan administrator is also required to return any earnings attributed to the excess but that is taxed in the year returned, so a 2019 excess returned in 2020 will generate 2 1099-R's - one with a code P in box 7 that goes on the 2019 tax return and places the excess on line 1 of the 1040 and one with a box 7 code 8 that reports the earnings that is reported on a 2020 that return.   The 1099-R with the code P (that must be reported on a amended 2019 tax return)   when it comes in 2021 can be ignored if the excess is reported as explained above on the 2019 tax return, otherwise it would require amending 2019 to report it.

[macuser_22]

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@jackFF wrote:

so what if I do NOT report it this year (per DaveF1006 post on 4/6/20) - even through I had the excess distributed before April 15?, and next year use the 1099R that will be issued - will I have to pay a penalty? Again,  I had ~6K that was distributed and TT calculations make me pay and extra 2.9K in taxes or ~50% of the 6K which seems completely out of wack and disproportionate...

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See my last post.   If not reported now, then when the code P 1099-R comes in 2021, you will have to amend 2019 to report it.  A 2020 1099-R with a code P can only be reported in a 2019 tax return.   You can avoid the hassle of amending by just adding the returned excess to the 2019 1040 line 1 as explained above.   That does EXACTLY the same thing that a 2020 code P 1099-R would do on an amended return.

[romeshdaisy]

I have been reading through all the posts on excess 401K deferrals. In the end I am still not 100% sure what is the right way to go ahead with filing with TT. In my case the 2019 excess deferrals check came to me before April 15, 2020 and the reason was that my employer company failed to satisfy the ADP test. I received a check for $ 12000/- together with a statement from the plan provider that gave its break-up of Excess amount of $10500 plus Earnings of $2500.

The point that is unclear to me pertains to this narrative in macuser_22 post:

"Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Include the loss as a negative amount on Schedule 1 (Form 1040), line 21, and identify it as “Loss on Excess Deferral Distribution.”

Enter as:
Miscellionious Income ->
Other reportable Income ->
Any Other Taxable Income (yes) ->
Description (enter "Loss on Excess Deferral Distribution" and amount as a negative number)."

Does it mean that you report a loss on a corrective distribution of an excess deferral in the 2020 return?

WHAT I DID SO FAR IS THAT I ADDED $10500 AS MISCELLANEOUS  INCOME AND FOLLOWED EXACTLY WHAT IS SAID ABOVE.

IS THAT ALL I HAVE TO DO FOR THE 2019 RETURN ON THIS COUNT?

ANY HELP WOULD BE EXTREMELY APPRECIATED.

Thanks in advance!