Entering Return of Excess 401k Contribution without 1099 or W2c

[Tyfosho]

Hi all,

There are a few other threads about this topic, but none that seem to fit my same situation so I'm looking for some confirmation that I'm doing this correctly.

I had two jobs in 2021 and accidentally over-contributed to my 401k. I submitted a ROE form to my employer who submitted it to Fidelity. This was processed and I received a check from Fidelity for my over-contribution amount and earnings. However, Fidelity will not be sending me a 1099-R until 2023. My employer will also not be sending me a W2c since the money came from Fidelity, not from them. 

Unfortunately, I'm seeing conflicting recommendations from TurboTax on how to handle this: 

A TurboTax Help Community post tells me to add the excess return as "Other Income", but TurboTax help tells me that I should add a 2022 1099-R with the assumed numbers in boxes 1, 2, and 7, even though Fidelity hasn't generated this yet.

Which of the two solutions above is correct?

[Tyfosho]

@KathrynG3 @ErnieS0 @MinhT1 - wondering if you might be able to weigh in here since you've been helpful on previous, similar threads 🙂

[MinhT1]

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

[Tyfosho]

Thanks @MinhT1 

Two quick follow-up questions:
1) After doing this, TurboTax still warns me that I have over-contributed to my 401k. Do I just ignore this warning? 

2) In the IRS 2022 instructions for 1099Rs (Pg. 17), it says that "that the earnings are taxable in the year in which the contributions were made", so wouldn't this mean that I would need to pay taxes on the earnings in 2021 since that's the year my contributions were made?

[MarilynG1]

Yes, you would pay the tax on earnings, but you don't know what they are yet, so for now you are reporting the amount of your Excess Contribution as 'Other Income'. 

You may receive two 1099-R's eventually.  One may show the Excess Contribution amount (which you can save for your records, since you already reported it).

The other will report Earnings, which you will enter in TurboTax and pay tax on.

Click this link for more info on Excess 401K Contributions.

[Tyfosho]

@MarilynG1 - But for the 1099 for the earnings, I'll have to amend my 2021 return unless I enter that now, right?

TurboTax Help seems to state (in the picture in my original post) that if I enter the total amount returned from Fidelity as both the Box 1 and Box 2a amount, code P in Box 7, and state it's a 2022 1099 then I should be able to submit everything now without a future amendment.

This also makes sense to me because reporting the whole amount as taxable would mean that I'd then pay taxes on my both contributions (which were deducted pre-tax) and the earnings in 2021 which aligns with the IRS guidance for 1099-Rs.

Is there something I'm overlooking?

[MarilynG1]

Entering a 1099-R with excess/earnings as you suggest, will get the income taxed, but won't remove the overcontribution error from your W-2s and penalty assessment. 

Otherwise, you could change the Box 12 amount on one of your W-2s (but still need to report excess/earnings as 'Other Income') to account for the changed W-2 but get rid of the TurboTax overcontribution error. 

If you do this, you may want to make two 'Other Income' entries; one for 'excess deferral' (to account for Box 12 change)  and one for 'earnings on excess deferral', then ignore the the 1099-Rs you receive later. 

[Tyfosho]

Thanks for the explanation. 

I went ahead and entered the excess contribution as "Other Income" as you suggested, and didn't change the Box 12 on my W2, but Turbotax still seems to be giving me the error that I over-contributed. Is there something else I might be missing?

[DanaB27]

No, you can ignore the message since you took steps to correct the excess deferral and added the excess to your wages.

Please see IRS Publication 525 for additional information.

[superconductor]

What do you do in the case when the excess contribution exceeds $2,400? In my case, it was $2,725.66.

[CLTaxx]

For excess contributions related to being a highly compensated employee.  I received a 2023 excess contribution in 2024.  I interpret the code as needing to report this for the 2024 tax year since that's the year the excess contributions were distributed to me.  There was taxable amount and withholding.

[DanaB27]

Yes, that is correct.

Pub 525 states: "If you contributed more to the plan than allowed, the excess contributions may be distributed to you. You must include the distribution in your income on Form 1040 or 1040-SR, line 1h.

If you receive a corrective distribution of excess contributions (and allocable income), it's included in your income in the year of the distribution. The allocable income is the amount of gain or loss through the end of the plan year for which the contribution was made that is allocable to the excess contributions. You should receive a Form 1099-R for the year the excess contributions are distributed to you. Add the distribution to your wages for that year."

@chaslindstrom 

[Jason_123]

thanks for the guidance @DanaB27 , i'm in the same boat as the @CLTaxx, but i have a clarification question.

I received a distribution for being an HCE in 2023. This distribution was sent in 2024, and the attached letter says i will recieve a 1099-R NEXT year (in 2025). 

As you state it seems that the income will be entered through a 1099-R next year (in 2025 for 2024), but should i expect an updated/corrected W2 for 2023 from my employer, or is there nothing on there that would be affected by this?

thank you.

[DanaB27]

Yes, you will report it on your 2024 return. No, you don't need a corrected W2, this won't affect your 2023 return.

@Jason_123 

[MadhavanS]

How does it work for in-plan conversion Roth though? I contributed more than 2024 allowed limit of 69k. Since this is after tax contribution, its not extra income. How do i report it when i file the tax for 2024? Fidelity mentioned that they will send 1099-R excess form only in 2026 since they will provide the refund in 2025