Employer Excess Contribution

[11689ww]

We received an excess contribution letter from my husbands employer, after the April 15th Deadline.  However, we did file an extension, as we were suspect this might happen, due to low participation in the plan.  We also rolled this 401K to his IRA in the following tax year (2024).

Do we have to remove it from the IRA?  

How do we reflect this change on our return?

[tagteam]

I'll page @dmertz. Please check later.

[dmertz]

Is this actually an excess employer contribution or is it instead an employee excess elective deferral or excess after-tax contribution?

Has the employer issued any Forms 1099-R related to this excess contribution, including any corrected 2023 Forms 1099-R?

[11689ww]

We believe it was kicked back due to low participation rate in the plan, between highly copensated and hourly employees.  He contributed the max, with catch up contribution.  They kicked back over half of it, with no explanation as to why,  via a letter from the Plan Manager. They notified us in July of 2024, padt the April 15th 2024 deadline.  He has since left the company and rolled it to an IRA.  Do we remove it, pay tax, plus pay penalty because its past the April 15th deadline?  do we amend th4 2023 return or deal with it in 2024 tax return?

[11689ww]

We were told a1099-R reflecting the rollover and asjustment of excess will be processed but as of yet, we have not recieved anything. 

[dmertz · Accepted solution]

So this seems to be an excess employee elective deferral due to the plan failing ADP or ACP testing.

If the plan issues a corrected code-G Form 1099-R showing a lesser amount rolled over plus a Form 1099-R showing a return of the excess amount, the rollover will have included an amount that was eligible for rollover which becomes an excess contribution to the extent that it exceeds the amount eligible to have been made as a regular IRA contribution.  If he filed his 2023 tax return or requested a filing extension by April 15, 2024, the deadline to obtain a return of the excess contribution before the due date of the tax return, including extensions, is October 15, 2024.  If corrected after that date, the excess would be subject to an excess-contribution penalty for 2023 and every year after that until the excess is corrected by being distributed as a regular distribution.  Such a regular distribution nontaxable due to being a distribution of basis in nondeductible traditional IRA contributions (which would require an explanation statement on the tax return for the year in which this distribution occurs).

If the elective deferral was to the traditional 401(k) account, yes, the 2023 tax return needs to be amended to include the additional taxable income and, if the result is an excess contribution to the IRA and there is no return of the excess contribution, Form 5329 showing the excess contribution and penalty.  (This does depend on how the plan will be reporting this, but it seems likely that they will issue a corrected code-G Form 1099-R showing only the amount that was eligible for rollover.)