Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
Return of excess 401k contribution: how to file?
Posted by: Richard Berg, March 14, 2017 08:52PM
I changed employers in 2016, after maxing out my 401k at employer #1. I then contributed an additional $1275 to employer #2's trad 401k before turning off contributions. (if you go poking in my past threads to see why, ignore the hypotheticals about matching etc -- they ended up not being relevant)

Employer #2's W-2 shows:
Box 1 Wages = $X
Box 5 Medicare Wages = $(X+1275)
Box 12b code D = $1275

After notifying them, the Plan cut me a check for $1305.34. I assume this figure includes the gains attributed to the excess, though it did not zero out my balance (still shows a hundred bucks & change). Probably a timing quirk.

Since the excess was corrected before April 15, I thought #2 would issue me an amended W-2, but now they insist that's not the case. Instead, they will mail me a 1099 in early 2018. Hmm.

I've already filled out (but not filed) my 2016 tax forms based on the original W-2s. My intuition is I should proceed as follows:
(a) add $1305.34 to the amount currently on Form 1040 Line 7, then refigure any worksheets that depend on AGI
(b) add $30.34 to the amount currently on Form 8959 Line 1, then refigure those results (Form 1040 Lines 62 & 64)

Sound right?

Re: Return of excess 401k contribution: how to file?
Posted by: Alan S., March 15, 2017 02:51AM
First, this is an excess elective deferral not an excess contribution. There is a difference.

Either your or your tax professional's tax program will automatically add the 1275 excess to your line 7 wages as it will pick up the total Box 12b Code D amounts from the W-2 entry. If you are doing a paper return increase line 7 by 1275, not 1305.34.

The earnings on the return of your excess is taxable in the year distributed (2017) where it will be added to line 7 of that return. You will get two 1099R forms next January with different codes because of different years. (The earnings 1099R will have Code 8).

It is correct that the W-2 forms are NOT to be corrected. This is handled by the 1099R forms.

With respect to Form 8959, your Medicare tax was based on your wages before 401k deferrals, so deferring less to the 401k will not increase those taxes.

Re: Return of excess 401k contribution: how to file?
Posted by: Richard Berg, March 15, 2017 03:28AM
Thank you. I confirmed that your suggestions line up with Pub 560. Sadly, it seems there is much bad advice published on this topic e.g. [www.investopedia.com]

I am using the IRS's Free Fillable Forms this year. Fed up with the software cartel! Apart from rising prices, I have a growing list of situations they handle incorrectly, or force users to calculate by hand -- looks like I can add Box 12 Code D to that list.

Re: Return of excess 401k contribution: how to file?
Posted by: Alan S., March 15, 2017 05:47PM
I did not notice any errors in the Investopedia article. Popular tax programs handle this correctly, at least I have not heard of any complaints. Of course, they are not free in most cases, and some more basic versions would not handle this at all. That is probably what you are talking about - having to pay for a deluxe version in order to even report excess deferrals.

Re: Return of excess 401k contribution: how to file?
Posted by: Richard Berg, March 23, 2017 05:43PM
I was referring to this part of the article:

Quote:
In addition, if the excess amount was deferred on a pre-tax basis, your employer must amend your W-2 to show the returned amount as wages...

For example, assume your excess deferral occurred in 2007 and you provided timely notification to your plan administrator. If your contributions were made on a pre-tax basis, your employer must amend your W-2 for 2007 to show the excess deferral amount as taxable wages (in box 1).


Per our earlier discussion, it should be handled by 1099 forms instead.

Maybe an amended W-2 would come into play if the distribution was issued before year's end? (12/31/2007 in their example) However, they had previously defined "timely notification" as "by March 1, 2008".

----

I won't bore you with my complete list of errata in commercial tax software.* Suffice to say, I fill out at least 3 versions of my return each year, comparing the results against each other as well as my own understanding of the paper instructions. Anytime the Q&A section isn't detailed enough to compute my taxes correctly on the first try, I consider that a failure.

Expensive products are usually flexible enough to let you file the correct amount, provided you calculate that amount yourself. For example, I now know the workaround for my excess deferral situation is to add $1275 to TurboTax's misc nonwage income section; in TaxAct, the best workaround is to add a bogus 1099-R with code 8. To their credit, those programs were smart enough to flag the total Box 12 Code D amounts as "suspicious". Just not smart enough to suggest the right fix, or better yet, automate it.

Free products such as CreditKarma, apart from producing more total failures, lack the tools to perform such manual overrides even if you recognize the failure. Although they claim to handle everyone, in reality they're aimed at the 1040EZ crowd.

*at least, not in this thread. If you know a good place to warn others of potential gotchas (unrelated to retirement savings, mostly), I'm happy to share.

Re: Return of excess 401k contribution: how to file?
Posted by: Alan S., March 23, 2017 08:03PM
In another forum, a taxpayer stated that when they rechecked their line 7 wages on a TurboTax prepared return, the excess Code D amount over the 402g limit was automatically added to wages.

But your findings appear different. While TurboTax has multiple editions this does not seem like an issue that would be handled differently based on the edition producing the return.

Yes, a 1099R issued in error in a case like this could trigger multiple problems.



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