Help Needed ASAP - 401k Excess Contribution

[ETax847]

I have a client that over funded her 401k.  Her employer refunded the excess contributions and earnings this week and said she'd receive a 1099R in January of 2016.  Do I include the excess income on her 2014 return or true it up on her 2015 return?

 

No corrected w2 was issued.

[Pacun]

I think you don't have to do anything in 2014 because you have until April 15 to take out the excess contribution, including any earnings that that money made. So in 2015, you will have to deal with the 1099-R.

[gfizer]

I agree with Pacun.  Nothing to do until you receive the 1099-R for 2015.

Edited April 15, 2015 by gfizer

[ETax847]

Wow! Thanks for the prompt response. This board has been a tremendous help!

[RitaB]

I would think it will all get handled on 2015. Cash basis client, I assume, and the refund happened in 2015, it will increase income in 2015, is what ER is saying. It's the wrong day to worry about it, that's my motto. Either get an extension or file with what you have today is what I'd do. You didn't mess up, the client did. If 2014 has to be amended, oh well, there's another tax return you can charge for.

Edit: Sorry, I took too long to answer, and just look stupid now cause everybody was quicker. Sad day.

Edited April 15, 2015 by RitaB

[ETax847]

All responses are appreciated, regardless of the timing.  Thanks Rita B.

[jklcpa]

From the IRS site regarding excess contributions and deferrals:

 

Correction of excess deferrals after the year.   If you have excess deferrals for a year, you may receive a correcting distribution of the excess deferral no later than April 15 of the following year. The plan can distribute the excess deferral (and any income allocable to the excess) no later than April 15 of the year following the year the excess deferral was made.

 

Tax treatment of excess deferrals not attributable to Roth contributions.   If the excess deferral is distributed by April 15 (of the following year), it is included in your income in the year contributed and the earnings on the excess deferral will be taxed in the year distributed.

[RitaB]

From the IRS site regarding excess contributions and deferrals:

 

Correction of excess deferrals after the year.   If you have excess deferrals for a year, you may receive a correcting distribution of the excess deferral no later than April 15 of the following year. The plan can distribute the excess deferral (and any income allocable to the excess) no later than April 15 of the year following the year the excess deferral was made.

 

Tax treatment of excess deferrals not attributable to Roth contributions.   If the excess deferral is distributed by April 15 (of the following year), it is included in your income in the year contributed and the earnings on the excess deferral will be taxed in the year distributed.

OK, then there's the CORRECT answer... LOL. Go, Judy, you are MVP for 2014 without a doubt.

Edited April 15, 2015 by RitaB

[ETax847]

Judy, thanks for citing a source! 

[jklcpa]

I haven't had one of these in quite a while, and it came out on the 1099R the following year, but I don't remember how that data was presented.  I think it had code 8 and was reported the following year.

 

The 1040 instructions say that the plan administrator must notify the participant which year to properly include the income.  It's in the instructions to lines 16a and 16b under "corrective distributions".

 

If the plan administrator said that the form will be for 2015, then I'd report it in that year since that is what the client told you, document the convo, and not worry about it today.  Did the client receive anything in writing?

[Lion EA]

The form will come out for 2015, BUT if it has a code P then it gets added to 2014 income.  It's the 15th.  I'd worry about it next year and charge for an amendment if necessary.

[Cathy]

It needs to be handled on the 2014 return. The Code P will indicate that the figures are for 2014! Handle it NOW or with an amended 2014 return.

[Cathy]

P—Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2014.

The above are included in the instructions for an excess contribution such as the one in this post.

[Cathy]

I have a client that over funded her 401k.  Her employer refunded the excess contributions and earnings this week and said she'd receive a 1099R in January of 2016.  Do I include the excess income on her 2014 return or true it up on her 2015 return?

 

No corrected w2 was issued.

 

I was on the road earlier in my posts above so now I can give you a clear answer.  I had a similar client who for years we would have to wait on the amount of the excess deferral and earnings the excess earned to be able to include them on the return IN THE YEAR OF THE EXCESS DEFERRALS.

 

In other words, the reason the employer gave those figures to the employee now is so they can be included on the 2014 return.  The 2015 1099-R will be coded P and the instructions for Code P on the 2015 1099-R will state "Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2014.

 

This is a common situation, thank goodness not the "normal situation"......as long as the employer corrects the situation so the figures can be included on the tax return for the year when the excess deferrals were made, there won't be any excise taxes due...no 50% penalty, etc...

 

From what I understand, you might have this situation among highly paid employees and the excess is determined by the computations that must be made at the end of the year in comparing lower wages paid to other employees, etc....anyway, it is a complicated calculation, therefore, you usually don't have the figures until right before the filing deadline.  Get ready...it's probably going to be a yearly occurance with your client.

[BulldogTom]

 

From what I understand, you might have this situation among highly paid employees and the excess is determined by the computations that must be made at the end of the year in comparing lower wages paid to other employees, etc....anyway, it is a complicated calculation, therefore, you usually don't have the figures until right before the filing deadline.  Get ready...it's probably going to be a yearly occurance with your client.

It normally applies in situations where Highly Compensated Employees (HCE's) make deferrals based on an estimate of what the allowed amount will be after the discrimination testing is done for the year and they have deferred more than allowed. 

 

This used to be a common occurrence at the company I work for.  There are so many low wage workers who will not contribute to the 401K plan that the HCE's got to defer almost nothing based on the testing.

 

We put in a Safe Harbor plan and the owners are very happy about it.

 

Tom

Newark, CA