Excessive contribution to 401k in 2021 - Vanguard said to report in 2022 tax return?

[macuser_22]

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@hozefas wrote:

If I do not refund the excess, do I have to pay the 6% penalty in 2021? Do I have to keep paying the 6% penalty each year the excess remains in the account?

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There is no 6% penalty for a 401(k) - the 6% penalty applies to IRA's.

[sankumar]

Hello @DianeW777 

I have a similar situation with excess where I've over contributed for the year 2021 (2 employers) by almost $800. I've notified both plan administrators (although late), I have not been able to get a return of excess from either them prior to tax deadline of April 15th for excess distributions. 

The excess I wanted to remove is from my second employer and is a combination of pre-tax and ROTH 401k contributions. 

I plan to report the excess as income for 2021 as you had suggested earlier in this thread but since it is a combination of both ROTH (which is already taxed), do I have to still include the full amount or just the pre-tax 401K contribution?

Also, you had mentioned after the April 15th deadline the amount needs to stay in the account until it is ready for distribution (retirement). Which employer plan will I be taxed from at that time of distribution? 

Thanks in advance!!

[macuser_22]

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@sankumar wrote:

Hello @DianeW777 

Which employer plan will I be taxed from at that time of distribution? 

Thanks in advance!!

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You misunderstand.

When you take ANY 401(k) distribution it is taxed as ordinal income.    The excess that stays in the plan is just part of the overall 401(k) value and is not separate.       The only *additional* tax on the excess is in 2021 that you must add back into your taxable wages because excess deferrals cannot reduce your taxable income and must be added back in.   That is what is meant as "double tax".

[liza91]

I have a relating question: I have excess 2022 SOLO 401K contributions that I will file in my 2023 tax return. I have to submit an Individual 401(k) Distribution Request Form to my brokerage by the 2022 tax deadline. The form asks to list the earnings of the excess deferral amount. 

• What is the calculation for earnings?
• Would the calculation be similar to or identical to the calculation used for the Earnings Calculation for Returned or Recharacterized IRA Contributions listed here: https://www.irs.gov/pub/irs-drop/n-00-39.pdf?

[DanaB27]

Yes, calculating the earnings on an excess contribution will use this formula:

Contribution x (Adjusted Closing Balance -Adjusted Opening Balance)/ Adjusted Opening Balance

(26 CFR § 1.408-11)

But generally, your custodian will calculate the earnings for you.

Please be aware, if you do not take out the excess amount by April 15th, then you are taxed twice on the excess deferral left in the plan.  This happens once when you contribute it (with the steps below) and again when you receive it as a distribution. You can't include the excess amount in the cost of the contract even though you included it in your income.

Please follow the steps below to add the excess deferral:

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: 

2023 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 2022. 
• However, the earnings on Form 1099-R with Code 8 in box 7 should be reported in 2023.

@liza91 

[liza91]

This calculation is applied to an IRA. Does it also apply to an Individual 401K? The IRA calculation produces a number more than double the amount of any account performance gain from the time period of the initial contribution date to the removal date.

[DanaB27]

Yes, this calculation also applies to calculating the earnings for a 401(k).

It would be best to check with your custodian if they can calculate the earnings for you since these calculations can be complicated.

@liza91 

[Zzzz5]

Thanks everyone for the advices. I have a similar tax situation where I overcontributed (in 2022) when switching companies. The excess was withdraw the following year (Feb 2023). I got a 1099-R in 2024 with code P in box 7. I read some other posts on this forum. The suggest was to amend prior year tax. But this post suggests that the correction can be done in the tax year when I received the form (2024). Could someone help me understand why the answers are different? Is it because of the $ threshold? 

Example:https://ttlc.intuit.com/community/taxes/discussion/1099-r-code-p-what-to-do/00/1442903

If I follow the instructions here, 1) I do not need to amend my 2022 tax; 2) I do not enter the 1099-R (with code P) in my normal 1099-R section and 3) I would need to report the excess under "Miscellaneous Income" section. Am I correct?

Any advices are appreciated!

[RobertB4444]

You are correct.  Because this was income that should have been included in your W2 and has already had social security and medicare paid on it it is just added to your income for the year.  

The reason that there are two answers is that the first was for you to have added it to your 2022 tax return in 2023 when you first received the refund.  Since it wasn't added last year it can be added this year so that you have the income matching the form that you received.

@Zzzz5