Excess deferral to 401K and 1099-R

[Jvl]

I accidentally made excess contributions to my 401K back in 2019, but did not receive refund of the excess amount until Jan 2020. When I filed my taxes for 2019, the total amount of deferral exceeded $19000 (as reported from both my W-2 forms combined). Now I received a 1099-R for the excess amount that was refunded to me in Jan 2020. Upon reporting the 1099-R for tax year 2020, TurboTax is instructing me to revise my 2019 taxes. Do I need to, or is reporting 1099-R sufficient? Of note, the excess amount that was refunded to me did not have federal and/or state taxes withheld.

[DanaB27 · Accepted solution]

If you did not report the excess deferral on line 1 of Form 1040 already on your 2019 return then you will have to amend your return to add the 1099-R with code P in box 7. Please see How do I amend my 2019 return? and enter the 1099-R with code P.

When you filed your 2019 return did enter the excess deferral like below? If yes, then you do not need to amend your return and can ignore Form 1099-R with code P.

To report the excess 401(k) contributions and subsequent distributions, a 2019 plan excess distributed in 2020 is reported on line 1 of your 2019 Form 1040:

1. Click "Federal" from the left side of your screen
2. Scroll  down to "Less Common Income" and click "Show More"
3. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
4. Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
5. On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
6. Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
7. On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
8. On the "Any Other Earned Income" screen enter "2020 Excess 401(k) Deferrals" for the description, enter the amount and click "Done". 

Please note for the Tax Year 2020 tax filing due May 17th, 2021: 

2021 Forms 1099-R will be issued reporting the excess.

• Form 1099-R with code P in box 7 can be ignored if you reported the excess as described above in 2019. 
• However, the earnings on Form 1099-R with Code 8 in box 7 should be reported in 2020.

[Raescott]

Dear @DanaB27 ,

The advice given in the above reply, how to report the excess deferral in the year the income was erroneously deferred, is contrary to the advice provided in TurboTax.  The following is the "help" provided in TurboTax 2021 (to address an excess deferral that occurred in 2021 and is discovered it before filing 2021 taxes) : 

Steps to Take to Remove an Excess Salary Deferral 
1. Figure out which retirement account you want to remove the excess salary deferral from. You can use IRS Publication 560, Retirement Plans for Small Business, to help you decide.
2. Notify the plan administrator (the company or broker that handles your retirement account) that you have an excess salary deferral as soon as possible. Depending on the rules of your plan, and whether the plan administrator is notified sufficiently ahead of the tax return due date, you may be able to withdraw the funds to avoid paying additional taxes on the excess deferral. If you are able to withdraw the funds, here is how to
report that:

1. Report the excess deferral on your 2021 return in the Income section for Retirement Plans and Social Security whether or not you received a Form 1099-R before you file your return. Enter as much information as you can. Report the excess deferral amount in boxes 1 and 2a, and use code P in box 7. Indicate that this is a 2022 Form 1099-R.
2. In 2022, you will probably receive two Forms 1099-R. One reports the excess deferral amount. The other reports the earnings on the excess deferral. Enter both of these forms in your 2022 return, and we'll only add the earnings to your 2022 income.

So ... what is the right way? I notified the plan administrator March 1, now waiting for the employer to make a disbursement and issue a 1099-R.  If I do receive the 1099-R before April 15, 2021, which advice to follow? Or, if I do not receive it by April 15, which advice to follow? 

One last item, if I follow the "help" advice, the referenced code P in box 7 says it is for 2020, which casts some doubt the "help" advice. 

[DanaB27]

Both instructions are correct, if you enter a 2022 Form 1099-R with code P, with the IRA/SEP/SIMPLE box not checked, then TurboTax will add the amount to your wages in 2021. But Form 1099-R has more details to fill in therefore it might be easier to use the instructions above.

If you do not receive the excess deferral by April 15th then you are taxed twice on the excess deferral.  This happens once when you contribute it (you will have to add it to your wages with the steps above) and again when you receive it as a distribution (enter Form 1099-R). You can't include the excess amount in the cost of the contract even though you included it in your income.

A code P on a 2022 Form 1099-R means "Return of contribution taxable in 2021" that is why you need to select what year is on the form in the follow-up question.

@Raescott

[mvbarv]

I'm still confused about excess 401K deferrals.  I changed employers in 2021 and thus over contributed to the 401Ks.  I notified both employers who referred me Fidelity who has informed me it's too late to make changes.  So I added the amount to Other income s instructed when I completed my 2021 return.  Do I need to go back to one of the employers and have them do something?  Back to Fidelity?  How will one 401K plan know that the other over-deferred?  Do I just forget about it as I have reported the excess deferral as income in 2021?  I don't understand what my next step is if anything.  Thanks for any help you can provide.

[DanaB27]

Since you did not take out the excess amount by April 15th, you are taxed twice on the excess deferral left in the plan.  This happens once when you contribute it (with the steps below on your 2021 tax return) and again when you receive it as a distribution (receive and report Form 1099-R). You cannot include the excess amount in the cost of the contract even though you included it in your income. Since you are taxed twice on the excess you can leave the excess in the 401k for now. 

1. Login to your TurboTax Account 
2. Click "Federal" from 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 "2021 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

@mvbarv

[mvbarv]

Thanks for your reply.  So I personally do not need to do anything other than to pay taxes a second time when I withdraw the funds sometime after 59 1/2.  Meanwhile no 1099-R's will be coming my way until then?  No 10% penalty and no earnings on the excess?

[DanaB27]

Yes, that is correct. You won't get any 1099-Rs until you request the distribution which will be taxable income. Yes, if you withdraw it after 59 1/2 then there won't be the 10% early withdrawal penalty.

@mvbarv