Crazy situation with excess 401K contribution

[next_milenium]

I retired at the end of December 2022. My employer's accounting practice is such that they have to close out all payroll related items before the actual separation date. Because of this, they paid my last paycheck (for January 2023) in December 2022. This last paycheck contributed $2,200 to 401K because I had it on automatic plan to invest from every paycheck.

This spells trouble because I had already maxed out on my annual 401K contribution before receiving this unexpected paycheck. As a result, I received a W2 that shows I have contributed more than the allowed annual maximum. 

What makes this crazy is that the 401K administrator's system caught this over contribution and is now sending me a check as a refund. They said they will issue me a 1099R next year for the distribution of excess contribution.

Everything is good, right? No! Because the 401K's year end statement shows my annual contribution amount before the last excess contribution! So the annual contribution amount on W2 and year end statement does not match.

So my question is, how do I handle this situation? 

1) Do I file my taxes as if the excess contribution didn't happen since the year end statement does not show the excess amount? After all, I have the year end statement to prove I didn't go over the limit if I ever get audited.

2) Or do I file it with the over contribution amount shown on W2? Will TurboTax have a way to show the excess amount was returned to me? Do I pay any penalty or interest?

Thank you in advance!!!

[next_milenium]

Hope my loooong post did not stump the experts!!!

Please chime in and help if you can! Thank you!

[DaveF1006 · Accepted solution]

 Yes, report the  amount that is listed in Box 12 of your W2 then do the following:

1. Sign in to TurboTax and open or continue your return
2. Go to Wages & Income under Federal
3. Under Less Common Income, select Start or Revisit next to Miscellaneous Income, 1099-A, 1099-C
4. Select Start next to Other income not already reported on a Form W-2 or Form 1099
5. Answer Yes to Did you receive any other wages?, then Continue
6. Continue until you get to the Any other earned income screen. Answer Yes and select Continue
7. On the Enter Source of Other Earned income screen, select Other and Continue
8. On the Any Other Earned Income screen, enter 2022 Excess 401(k) Deferrals for the description, enter the amount, and select Done
9. Now right below that line in your previous entry, enter the following description. I returned the excess 401K contribution by April 18, 2023 and then enter the same amount with a minus sign in front of the amount.
10. Keep a copy of your refund check that your administrator sent you so you have proof that the excess contribution was returned to you before the April 18 deadline.

For Tax Year 2023:

Your 2023 Form 1099-R form will be issued reporting the excess 2022 401(k) deferral you received as a distribution in 2023.

• You can ignore a Form 1099-R with code P in box 7 if you reported the excess as described above in 2022
• But, the earnings on Form 1099-R with code 8 in box 7 should be reported in 2023.

It's unfortunate that you weren't sent a corrected W2 to avoid this. 

[next_milenium]

Thank you so very much! You are AWESOME!

Just to follow up, the excess 401K deferrals I received as distribution in 2023 will need to be reported as income when I file 2023 tax, correct?

[next_milenium]

TurboTax now says I can't e-file because I entered a negative value per your instruction line 9.

Is there a way to fix this so I can e-file?

[DanaB27]

To confirm, your W-2 reported an excess contribution in box 12, and therefore less taxable income was reported in box 1. Also, your 401k confirmed it was an excess deferral for 2022 and return the excess plus earnings in 2023.

If this is correct then you will not enter step 9 that Tax Expert DaveF1006 mentioned above.

Please only follow the steps below:

1. Login to your TurboTax Account 
2. Click "Wages & Income" (under Federal) on the left side of your screen
3. Scroll  down to "Less Common Income" and click "Show More"
4. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
5. Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
6. On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
7. Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
8. On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
9. On the "Any Other Earned Income" screen enter "2022 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

If you receive the distribution of the excess deferral and earnings by April 15th then please note for the Tax Year 2023 tax filing due April 15, 2024: 

• Form 1099-R with code P in box 7 can be ignored if you reported the excess as described above in 2022. 
• However, the earnings on Form 1099-R with Code 8 in box 7 should be reported in 2023.

For your information, an excess deferral won't trigger a penalty on the return like an IRA excess contribution but if you do not take out the excess amount by April 15th (this date isn't the same as the due date of the return), then you are taxed twice on the excess deferral left in the plan. This happens once when you contribute it (with the steps above) and again when you receive it as a distribution (Form 1099-R). You can't include the excess amount in the cost of the contract even though you included it in your income.

Please see Pub 525 for additional information.

@next_milenium 

[adyady]

my 401k excess deferral was caught after I filed my 2022 taxes and after the April 15 redistribution. Under what section on turbotax to I input the amount? I started an amendment but not sure under what section to put it on? I am not taking the actual distribution so does my plan holder need to fill out a 1099-R. The funds are staying in my 401k.

 

[kkwood123]

I'm having the same issue that my plan is unable to distribute the excess deferral after Apr 15 deadline.

Question:

1) how do I report it in 2022 tax year in Turbotax?

2) I assume there will not be a 1099-R until eventual termination of the plan (e.g. age 59 1/2). Do I report tax again until then?