1099-R Box 5 exceeds Box 1

[macuser_22]

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@Inugasuki wrote:

This is my ROTH 401(k).  I believe my employer failed ADP test.

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If this was a Distributions Under Employee Plans Compliance Resolution System (EPCRS) for a ADP test then I believe that box 5 should be blank and the box 7  would have a code "E" only.

[dmertz]

This code B8 Form 1099-R appears to me to be correct except that box 2a should have a zero in it.  Box 2a seems to have been left blank by the preparer to indicate that none of the distribution is taxable, but that's not really proper if the taxable amount is truly known to be zero, which it is in this case.

What this From 1099-R is saying is that, due to failing ADP testing, there was an excess contribution of the amount shown in box 5.  However, the investments in the account lost value in the interim, so the amount distributed, shown in box 1, was less that the amount originally contributed.  The amount in box 5 simply represents the amount by which the contribution basis in the Designated Roth Account has been reduced by this return of excess contribution.

To satisfy TurboTax, you'll need to enter a zero in box 2a.

[Inugasuki]

Since this is ROTH, I understand the amount in box 5 was taxed as part of my W-2 wages.  As "Return of ADP Excess," I received a check in the amount of Box 1, which is less than the amount in Box 5.  Would it be possible to claim a loss for the difference?

[dmertz]

No, this loss cannot be claimed as a deduction.  That might have been possible before 2018 or after 2025, but for 2018 through 2025 miscellaneous deductions subject to the 2%-of-AGI floor have been suspended by the Tax Cuts and Jobs Act of 2017.

[Inugasuki]

I was able to confirm that the investment lost value and that the excess amount (Box 5 over Box 1) represents a negative taxable amount.  Can I claim a short-term capital loss then?

[dmertz]

To recognize a loss relative to your basis in Roth 401(k) contributions it would have to be claimed as a miscellaneous deduction subject to the 2% of AGI floor, but miscellaneous deductions subject to the 2% of AGI floor have been suspended by the Tax Cuts and Jobs Act of 2017 for tax years 2018 through 2025, so no, there is no way to recognize the loss.  Distributions from retirement accounts are treated as ordinary income and are not subject to capital gains treatment.