Excessive contribution to 401k in 2021 - Vanguard said to report in 2022 tax return?

[Helen2014]

Hi Turbo Tax Community. I have a question about excessive contribution to my 401k and how vanguard handles the situation. I requested refund of the excessive amount, and they gave me seemingly contradict information in their letter with the check to me.

Here are the details:

In 2021, I changed job and worked for two companies. I over contributed $300 to my 401k in 2021, and my current company's 401k administrator (vanguard) returned the $300 to me via a check in February 2022. The check is received along with a letter. 

The letter states that:

"Your corrective contribution of excessive deferrals is required by the IRS to be reported on two 2021 IRS forms 1099-R.

One of these tax forms will be specifically coded to report the principal amount of your excessive deferrals which will be tax to you in 2022. These forms will be sent to you in January 2023. 

Because you will not receive the IRS form 1099-R till next year, do not wait to file your 2021 form 1040. In addition, if you have already filed your form 1040 and did not included the principal amount of excess deferrals as taxable income (line 7), you will need to file an amended return for this year.

The amount of your refund is not eligible for rollover into another qualified plan or individual retirement account ("IRA") "

Here is my confusion:

1. In the letter it stated that I need to file my 2021 tax with the principal amount of excess 401k contribution but I will not receive any tax form for the excess till 2022. How do I report the amount?

2. I called vanguard and asked for some help and explanation and they told me that I will receive two 1099-R in 2023, and the excess $300 will be my 2022 income. 

Based on my research, my employer should give me a new w-2 so that I can report it this year.  He https://www.nerdwallet.com/article/investing/excess-401k-contribution-what-to-do

But vanguard said that was not how they handle it.

If I report the excess amount in 2021 tax and vanguard gives me 1099-R in 2023 for 2022 tax, does it mean that I will be taxed twice?

Thanks.

[MinhT1]

Vanguard is correct. However, you do not need to create a 2021 form 1099-R to report your excess contribution. In 2023, when you receive your two forms 1099-R, do not report the one with the excess contribution but keep it in your tax recordsOnly report the form 1099-R with your earnings on your 2022 tax return.

Here is what you should do:

Reporting excess salary deferrals (excess 401k contributions) returned to you after the end of the tax year but by April 15th of the following tax year on your 1040.  Do not create your own 1099-R for this situation.

Pages 10 and 11 of IRS Pub 525 under Excess deferrals (the IRS term for 401K contribution is deferral) tells us to include the excess deferrals as income on line 1 of Form 1040 if the money was returned after the end of the tax year but by April 15th of the following tax year.  You need to report only the excess contribution, not any money generated by the investment of the excess contribution.  What you earned will be covered by a 1099-R for the following tax year and will be entered then as a normal 1099-R.

Below is how to do this in TurboTax:

• Click on Federal in the left-hand column, then on Wages & Income
• Under All Income, scroll down to Less Common Income
• Select Miscellaneous Income and click Start
• Select Other income not already reported on a Form W-2 or Form 1099 and click on Start
• Answer the question "Did you receive any other wages?  Yes
• Click through the questions till you get to Any Other Earned Income
• Answer Yes to Did you earn any other wages?
• Indicate Other as Source of Other Earned Income and click Continue
• For the description enter "2021 Excess 401K Deferrals" and click on Done

[Helen2014]

Thanks for your timely response.

If I do not report the $300 1099-R in 2023 for 2022 (so that I do not get double taxed) , will it cause any problem if my tax is audited? Thanks.

[BillM223]

So long as the corrective distribution was (will be)made before April 18, 2022, you can ignore the 1099-R for the excess in 2022 (it will have a code of "P", I believe).

This is because the excess was already taxed in 2022 when you went through the steps Minh gave above to add 2021 Excess 401K Deferrals to Misc income.

Your excess can be doubly taxed (the second 1099-R) if you receive the corrective distribution after April 18, 2022, but since you are already going to have it taxed in 2022, you can ignore the second 1900-R.

Just keep all these notes in your tax file in case the IRS ever writes you about it.

[GTP59]

I have a similar situation, with another plan provider. Federal Income Tax was withheld on the distribution (refunding my 2021 excess deferral in early 2022). Would I report that tax withheld on my 2021 return (through my corrected W-2 maybe?) or wait for 2022 filing season, when I believe it would be reflected on one of my two 1099-Rs (one for the deferral, the other for earnings)? 

[DianeW777]

No, do not include the federal withholding unless a corrected W-2 is received. You must report the distribution on the 2022 tax return along with the federal withholding assuming you do not receive a corrected W-2 for 2021, which is unlikely.  You will receive the Form 1099-R, as you indicated and you will report it in 2022 if no correction is made to reflect the correct amounts on the 2021 W-2.

The codes in Box 7 on the Form 1099-R will determine the taxability of the income for 2022.

• What do all the codes mean in Box 7, Form 1099-R?

[GTP59]

Thank you for the info! Am I right that my former employer would report the corrected income, deferral, and withholding amounts on the corrected W-2? I am also working with the plan administrator to correct the 1099-R info for next year; they mistakenly applied code 8, not code P, to the return of excess deferral. Fortunately I was able to see this online now and get it fixed, rather than being hit with a nasty surprise early next year. 

[DavidD66]

@GTP59  Yes, you are correct. Your employer should provide you a corrected W-2.  The returned excess contribution will be added to your total taxable wages for the previous year.  Any income earned from the excess contribution will be taxable in the year received, and will be reported on a 1099-R.

[GTP59]

That's helpful--thank you! I am wondering if the employer would also report on the corrected w-2 the federal income tax withheld from the returned excess deferral. The plan administrator withheld the tax. 

[DianeW777]

Yes, if there was federal withholding as indicated then your employer should also include this in the corrected W-2 as well.  Be sure to verify once you receive the form (W-2c).

Keep in mind that the W-2c will have only the corrected boxes completed so you must keep the original W-2 for all other boxes, to accurately complete your tax return.

[hozefas]

Hello @DianeW777 

I have a similar situation where my overall deferral for 2021 went above the limit by $500.  I have NOT filed my 2021 return yet. But in my case, the 401K provider will NOT be able to refund the $500 before the tax filing deadline (April 18th 2022) - since they need more time to process the refund. 

Do I have to show $500 as my income in my 2021 return?

Is that done by manually creating a 1099-R with Code 8 for $500?

Do I need to submit form 5329 and pay a 6% penalty in 2021?

Will my 401k provider send me 2 1099-Rs (Code P and Code 8 in 2023?

Do I have to amend my 2021 return? Or do I just enter that 1099-R in my 2022 return?

Thanks!!

[macuser_22]

---

@hozefas wrote:

Hello @DianeW777 

I have a similar situation where my overall deferral for 2021 went above the limit by $500.  I have NOT filed my 2021 return yet. But in my case, the 401K provider will NOT be able to refund the $500 before the tax filing deadline (April 18th 2022) - since they need more time to process the refund. 

Do I have to show $500 as my income in my 2021 return?

Is that done by manually creating a 1099-R with Code 8 for $500?

Do I need to submit form 5329 and pay a 6% penalty in 2021?

Will my 401k provider send me 2 1099-Rs (Code P and Code 8 in 2023?

Do I have to amend my 2021 return? Or do I just enter that 1099-R in my 2022 return?

Thanks!!

---

The date to remove it is not tied the the filing date, it is written into tax law as April 15, reguardless of the filing date which can be different.

If not removed by April 15, then it should not be removed at all since after that date it becomes taxable income that must be reported on line 1 of the 1040 form as wages since it was deducted from wages when the employer withheld if from your pay.      It will just stay in the account until retirment when it will be taxed again.  This double tax is the penality for not meeting the Apr. 15 date.

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 2021 wages on line 1.

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

[hozefas]

Do I not need to request a refund if I am doing this after April 15th? How do I report the excess income for 2021 in this case?

[macuser_22]

After April 15, 2022 it will be too late to get a refund.

Read my post. I told you exactally how to report it.    It does not get reported in 2022 if it was a 2021  excess.

[hozefas]

If I do not refund the excess, do I have to pay the 6% penalty in 2021? Do I have to keep paying the 6% penalty each year the excess remains in the account?