401k excess deferral

[FrugalFisherman10]

I'm back with another tax question babyy

As I was working through my taxes I discovered that I accidentally over contributed to my 401k for 2020.

I had two employers during 2020, one for the first part, a different one for the second half. Apparently when I calculated what percentage the 2nd employer should contribute to my 401k on my behalf, I accidentally calculated too much and overcontributed by $235.

I have since requested that my HR/Payroll/benefits department make a request to my plan administrator (Fidelity) to have them pay out this "excess deferral" back to me. I just heard back from my HR department that the deadline to get requests like this over to Fido was yesterday, 4/15.

(I actually had first requested this from Fidelity directly, prior to 4/15, but was told it had to come from my employer).


Anyway, what do I do know? My HR department is saying I should talk with a tax advisor and that I will be taxed on the $235 this year.
I'm a CPA so I can figure this stuff out if you help me along.
I'm fine with being taxed on the $235 this year but my questions are:
1) do I still need to remove the $235 at some point in the future?
2) I read something about the account potentially being considered "not a qualified plan"
3) did the extension of the tax deadline not help me out here?

What should I do now?

Thanks for any help


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[secondcor521]

You understand that the 401(k) contribution limit for employees does not include the employer portion, correct?

If you over contributed by $235, that means you contributed $19,735 yourself, excluding whatever employer match or employer contribution you may have had?

I mention that first because it's a common misunderstanding.

As far as your questions:

1.  You're supposed to.  I'm not sure what happens if you don't.  See https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-what-happens-when-an-employee-has-elective-deferrals-in-excess-of-the-limits

2.  Yep.  This is a consequence for your employers though, not you.

3.  Apparently not, because the IRS website mentioned above in (1) refers to April 15th specifically.  If the deadline were tied to the tax filing deadline, they usually write it that way.  (See, for example, any IRS web pages talking about the deadline for making IRA contributions, which do move with the tax filing deadline.)

[FrugalFisherman10]

Yes, I contributed $19,735 on my own. Thanks for clarifying

Ah so when they say it may make the "plan" not qualified they don't mean "my account"...?

So I need to take that up further with my employer and tell them to remove the exceeds deferral.


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[FrugalFisherman10]

Pretty annoying that the IRA doesn't detail what happens if the entire deferral is "not removed by April 15th, but removed eventually"

This seems like an obvious 3rd option they should discuss, given they suggest it should occur by saying "if it's allowed to stay in the plan then XX bad thing will happen"


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[secondcor521]

Yes, I contributed $19,735 on my own. Thanks for clarifying

Ah so when they say it may make the "plan" not qualified they don't mean "my account"...?

So I need to take that up further with my employer and tell them to remove the exceeds deferral.


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Right, it's a consequence for whomever you work for, not you.

Yes, you still probably want to do the paperwork with your employer/HR/your 401(k) custodian to remove the excess *plus attributable earnings*.  See the second half of the link in my previous post for how to handle it tax wise.

[FrugalFisherman10]

This article clarifies that the plan will only suffer if someone has contributed more than the maximum "in their account in their plan".  So since this was across two different accounts in two different plans under two different employers, neither plan will suffer I don't think.
https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-exceeded-code-402g-limits-for-the-calendar-year-and-excesses-were-not-distributed
"for a plan to be qualified, it must provide that the amount of elective deferrals for each participant under all plans of the same employer not exceed the 402(g) limits"

For me however, I'm still not sure what happens now...I need to work with HR to get them to pay me out, sure, but seems like I also need a corrected W-2 for 2020, and apparently I'll get taxed twice on this money, AND I'll get taxed a 10% additional: once in 2020 and once in 2021!
Example from the above article:
"For 2018 (year of deferral), Ann must include $500 in gross income. For 2019 (year of distribution), Ann must include $510 in gross income. Employer X would report this amount on Form 1099-R. In addition, Ann must pay the additional 10% early distribution tax under IRC Section 72(t)."


Jeez...lesson learned. Do NOT get ambitious about your 401k deferrals and try to get the exact amount contributed, especially in a year when you change jobs. Better to be safe than sorry. This is a pain


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[FrugalFisherman10]

"To the extent that a corrective distribution is not made within the correction period, the excess deferrals may not be distributed until a distribution is otherwise permissible under the terms of the plan, or the distribution is necessary to avoid plan disqualification under IRC Section 401(a)(30)"
https://www.irs.gov/retirement-plans/consequences-to-a-participant-who-makes-excess-deferrals-to-a-401k-plan

Oh wait, so according to this, they should actually not distribute the excess deferral now that the deadline has passed. It just has to stay in there, for 29.5 years (till I turn 59.5)!!! Haha. Oh man.

And I will "not receive basis" on this $235 when I go to withdraw it and it's earnings.

So basically it just became a complicated little pocket of money that will act like it was in a taxable account the whole time, is that a correct understanding?


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[FrugalFisherman10]

bump...can anyone confirm this?

So basically it just became a complicated little pocket of money that will act like it was in a taxable account the whole time, is that a correct understanding?