Excess deferral to 401k for 2019 taxes

[ck128]

Dear macuser_22:

             I think I understood you.    Are you saying still report the excess  as income like Minh's top answer, but do not take the distribution and just leave it in the plan.      The double tax scenario is pay income tax right now, and pay another tax when taking distribution in the future when retire.   Because if you don't report it, then there is no double tax and one got away making excess contribution.

            However TurboTax's example makes it confusing, it clearly suggest always make Fidelity do the refund no matter how late.

           Also, Jessica needs to amend and pay more tax because she already filed.   But for folks haven't filled, they can report this as income as Mihn's answer and avoid to amend the tax.  Right?

"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."  

[macuser_22]

An excess 401(k) deferral must ALWAYS be reported as wages for the tax year that the excess was made.   That is because the deferral was deducted from your W-2 box 1 taxable income by the employer.  When that becomes as excess deferral then is cannot be excluded from taxable income, therefore yiu must add it back.

If timely removed with the earnings then only the earnings will be taxable income in the tax rear returned.    If not timely removed then it will be taxed the same as any other 401(k) normal distribution whenever it is removed.    That is independent from including the excess as wages in the year the contribution was made.

[dmertz]

I hadn't noticed it before, but nik_sharma is correct.  Rev. Proc 2018-58 referenced by Notice 2020-23 includes in its list of actions with postponed deadlines the correction of excess deferrals (Section 8.19).  So the deadline for the employer plan to make the correction is July 15, 2020, but still it may already too late for the employer plan to process such a distribution by the July 15 deadline.

[nik_sharma]

Thanks @dmertz and @macuser_22 

I'm making a mad dash to get this deferral refunded. One more question: the overage was due to a job change in TY2019: we over contributed to the new job. Does the refund have to necessarily come from the new job's 401k plan? Or can I withdraw from the previous employer's 401k plan? Is there any chronological ordering that needs to be considered.. meaning MUST a withdraw be made  from the plan that you chronologically over-contributed to? 

The reason is that the new job's 401k administrator cannot move fast enough to refund by Jul15 but the previous employer can move within 1 day.

I found this on 2019 Publication 525 on page 10: 

Excess deferrals. If your deferrals exceed the limit, you must notify your plan by the date re-quired by the plan. If the plan permits, the ex-cess amount will be distributed to you. If you participate in more than one plan, you can have the excess paid out of any of the plans that per-mit these distributions. 

Appreciate your inputs on this ! Thanks so much!

[ck128]

Huge Kudos to Fidelity.    I haven't received my check but I called in and they said it's already resolved.  I should expect to receive a check soon.

Note they resolved this ON THE SAME DAY I faxed in my request last week.   This is unbelievable speed and excellent customer service!   I think the other user said "One plan administrator can act in 1 day" is probably referring to Fidelity.

Note the Fax number on the form is out of date, they give me a new one but I can not post here because it's censored by TurboTax.  Just call them to get the new fax number.

If you are find out this just now, don't give up, google for that form and FAX IT IN ASAP.

Again once I received my return check, I will shout out for Fidelity.   Fantastic Company!

[nik_sharma]

Hi @dmertz and @macuser_22 

Don't mean to be pushy, but would really appreciate your input on my question. Hope you can review... 

[macuser_22]

You answered your own question with the IRS quote.    It is usually easier to have the plan with the current employer return the excess.  They are usually more cooperative than where you not longer work.

[nik_sharma]

Haha, that's true in the general case. The issue is more with the new job's plan administrator moving slower.. I problem that I've created myself by filing this late. Thanks so much for your comments! Really appreciate it...

[macuser_22]

And as the IRS instructions say "If the plan permits..."

When two employers are involved and neither one exceeded the limits then some plans will never return the excess or allow distributions until you retire so you are stuck just leaving it in the plan and pay the tax twice.

[dmertz]

The return of excess deferrals can be from either of the 401(k) plans.

[augburto]

Thank you so much you are a true champ. This is my situation and I believe this is the solution for me. If you by chance see this

@macuser_22 If you by chance see this, I wanted to clarify after going through the replies, yes I agree it does NOT make sense to attempt to withdraw if you are under age 59 1/2 because then you would be taxed 10% for the early withdrawal penalty. In that case, it makes sense to simply do the 1040, file the excess income as miscellaneous income, and pay the tax as you described in the above or as T1Minh described.

However, I was also reading about another 6% tax penalty where every year if your plan has exceeded the contribution limit, you will get taxed 6%. I've been reading a lot of mixed things about whether this applies to 401(k)s but from what I understand, this penalty only applies to IRAs. Is that right? Or do I still need to file to remove the contribution to avoid this 6% penalty? It's unclear to me if someone was to file the 1040 and mark it as miscellaneous income, if they still need to try and pull out the excess from my 401(k) to avoid other penalties.

[macuser_22]

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@augburto wrote:

However, I was also reading about another 6% tax penalty where every year if your plan has exceeded the contribution limit, you will get taxed 6%. I've been reading a lot of mixed things about whether this applies to 401(k)s but from what I understand, this penalty only applies to IRAs. Is that right? Or do I still need to file to remove the contribution to avoid this 6% penalty? It's unclear to me if someone was to file the 1040 and mark it as miscellaneous income, if they still need to try and pull out the excess from my 401(k) to avoid other penalties.

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The repeating 6% penalty is for excess contributions that are not removed from an *IRA* - not a 401(k) plan.   There is no such penalty for a 401(k).

[marty00]

Hi all,

I want to document here that without this group/forum, I wouldn't have been able to do the right thing. Last week I had no clue and now I feel like an expert ;).

With @macuser_22's input, I added the excess contribution amount to my income (line 1) just like it says in Pub 525 page 10 and filed my taxes.

I had practically given up that anything will be done by Fidelity before July 15th based on my conversation with their rep on July 6th (despite my repeated request he said the only way to get the Excess Withdrawl "Kit" was via snail mail, which came to me on the 13th).  Turned out that it was just the form that I could download right from their website.  I was resigned to the fact that whenever I withdraw, I would have to pay taxes again. 

Then thanks to @ck128 miracle post where s/he shared the experience with Fidelity, I went back into action. My form had come in regular mail Monday afternoon, I saw that post a little later, called Fidelity again at 3;30 Pacific. This time an angel picked up the phone - completely different experience! She asked me to complete the form, get my both W2s - instructions to upload (as photos) using their mobile app! I completed this by 5:30 PM Pacific. The next day (14th) she followed up again (yes she called me!) letting me know that all was fine with the forms and their back-office was looking into it.  And then another call on the 15th ... all taken care of. In fact, they took the excess on the 14th itself and the check is in the mail - 1099's will follow later. 

Taxes paid in time, no need to amend later, excess received before July 15th - all good! Couldn't have done without this forum. And oh BTW, TT guidance was not accurate or clear either ... 

Wow!! Thanks again to all, especially to  @ck128  @macuser_22. 

Cheers.

[vartech]

my employer issued me a check for returned excess cont. Turbotax auto added the excess cont to income.  when I got my check it had taxes withheld.  Do I report the taxes on 2019 or in 2020 when I get the tax forms?  my understanding I report the actual amount over in 2019 and the gains in 2020. I just confused about taxes withheld.

[macuser_22]

Tax withheld in the year returned - 2020 same year as the earnings are reported.