February 14, 2022 at 7:15 pm #77464
After much sacrifice, I was fortunate enough to end 2020 by hitting the 2020 IRS overall 401k contribution limit ($57,000 exactly). Then, in 2021, my employer determined that they owed me more “Company Match – Safe Harbor” money for the 2020 401k plan year and deposited that additional money into my 401k account on March 31, 2021. Now since I hit the overall 401k contribution limit at the end of 2020, and was given additional money that also counts for 2020, we have an over-contribution situation for 401k plan year 2020. My company then realized this over-contribution situation for the 401k plan year 2020 and made a withdrawal (original contribution + associated earnings) on November 29, 2021. I received a 2021 1099-R form with IRS Code “E” (Box # 7 – “Distribution Code” – on the 1099-R form) along with a check for the withdrawal (minus federal and state withholding) to deposit into my bank account. This was not returned to me through payroll (they just gave me a separate check). I was told that this withdrawal is taxable to me for tax year 2021. However, I wonder, since the excess was tied to the 2020 401k plan year, if this same excess IS ALSO taxable in 2020. I have read various articles on the Internet indicating that it is important for a 401k excess contribution to be removed before the April 15th following the excess contribution otherwise one could end up with a double taxation situation (taxed in the year of contribution & again in the year of withdrawal). Do I need to go back and amend my 2020 taxes to take this situation into account or is this situation ONLY applicable to my 2021 taxes? If it is applicable to my 2020 taxes as well, maybe you can point me to a specific IRS publication (with a page reference) that can help to clarify that for me. Also, I am not sure if you need this information, but I live in Michigan.February 17, 2022 at 5:12 pm #77467
Does anybody have a moment to help with my question?February 18, 2022 at 5:05 pm #77468Kaye ThomasModerator
The double taxation issue you’ve read about relates to a situation where contributions made as a reduction in your salary (called elective deferrals) go over the limit for that type of contribution, which in 2020 was $19,500 or $26,000 depending on whether you were at least age 50 in that year. Normally this happens only when someone has two different employers in the same year, as these plans are designed to prevent participants from exceeding the elective deferral limit.
The situation you describe does not involve an excess elective deferral: it had to do with the company match rather than contributions from your salary. The requirement to correct by April 15 does not apply, and double taxation is not an issue. Your 2020 return is not affected.February 21, 2022 at 7:22 pm #77469
Thank you very much for taking the time to review & comment on my situation.
If you have another spare moment, I would like to point out a few more details to make sure there is no ambiguity in how I described my situation.
– The excess was deposited into the “Company Match Safe Harbor contributions” “bucket” inside my 401k on March 31, 2021. However, they withdrew the excess contribution + associated earnings from the “Roth in plan converted After Tax contributions” “bucket” inside my 401k on November 29, 2021. They told me that the 401k plan has a hierarchy of “buckets” that determines which “bucket” is to be withdrawn from first. This hierarchy indicated that the “Roth in plan converted After Tax contributions” “bucket” was the appropriate “bucket” to take the necessary withdrawal of excess contribution + associated earnings from.
– The Distribution Statement that I received for the withdrawal of excess states: “It has been determined that you had a 415c excess annual addition or excess amount in the above referenced retirement plan for the 2021 plan year.” This is why they applied IRS Code “E” (Box # 7 – “Distribution Code” – on the 2021 1099-R form).
– I am under 50 years old.
– I want to make sure I clarify that I exceeded the overall 401k contribution limit ($57,000) for 2020, not the 2020 Before Tax/Roth limit ($19,500).
– I did not have 2 different employers involved in this situation.
Knowing all of this:
1) I assume that your original assessment still holds true that my 2020 Federal income taxes are unaffected by this situation and do not need to be amended, correct?
2) I also assume that my 2020 Michigan state income tax return is unaffected by this situation and does not need to be amended, correct?
3) Considering I am under 50 years of age, this withdrawal of excess does not result in any penalties (6% excess contribution penalty, 10% early distribution penalty, or any other penalty), correct?
4) Is there anything else special that I need to be careful of when taking this return of excess into account on my 2021 taxes? It seems pretty straight forward: just fill out lines 5a & 5b & indicate the amount withheld on line 25b of Form 1040.
5) If you have it handy, and in case I get audited, I would love to have an IRS reference to backup the assessment “no need to amend 2020 taxes”. If this is too much trouble, don’t worry about it as I feel I have taken enough of your time. 🙂
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