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How to report excess 401k traditional and roth contributions from two employers?


David

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TP, over age 50, worked for two employers and had the following traditional 401K contribution deductions and Roth 401K contribution deductions:
Employer 1 - $11,267 pretax traditional 401K deductions; $11,267 after tax Roth 401K deductions.
Employer 2 - $12,500 pretax traditional 401K deductions; $12,000 after tax Roth 401K deductions. 

Total elective deferrals are $23,767 and total Roth contrib. to 401(k) plans are $23,267. The excess contributions are $22,534.

I want to make sure I am reporting this correctly. It appears that I need to report the excess contributions as additional income on the Wages line of the 1040. Also, the total excess is considered to all be from the elective deferrals. Therefore, the additional income will be reported as $22,534 excess salary deferrals.

The TP also needs to have both employers withdraw from the plan a total of $22,534 pretax traditional 401K deductions.

There are no penalties reported for this issue in 2018. A 1099-R will be issued to the TP for the $22,534 which results in the TP being taxed twice on the excess 401K contributions.

Is my understanding correct regarding this?

Thanks for your help.

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OK, after further looking at this issue it appears that no 1099-R will be issued since it is past the curing deadline of 4/15.

Before I report the $22,534 excess 401(k) contributions as additional income on the wages line of the TP's 1040, I want to make sure I'm doing the right thing.

Since his pretax 401(k) contributions are less than the $24,500 max allowed and since his Roth 401(k) contributions are less than the max allowed, but combined he has a total $22,534 excess contribution amount, can I choose to allocate the $22,534 excess contributions as Roth contributions so the TP doesn't owe tax on the excess amount?

I can't find any IRS cites that address how to treat the excess contributions when both traditional and Roth 401(k) contributions are made.  No information regarding whether the TP can choose to report the excess as all Roth.

Articles from my search say that when a TP has excess contributions all of the excess is reported as pretax contributions and any remaining excess is reported as Roth contributions. However, none of the articles state any IRS cites.

Does anyone know of any IRS cites that address how to treat the excess contributions when both traditional and Roth contributions were made?

Thanks for your help.

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Link to IRS page about excess contributions that has a lot of references to code sections, and also look specifically at the dialog under analysis. Perhaps the answers you seek are covered there. FTR, I only skimmed that page but think it will lead to your answers.

 https://www.irs.gov/retirement-plans/consequences-to-a-participant-who-makes-excess-deferrals-to-a-401k-plan

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Thanks for your help.

I did read that link and it doesn't address allocating the excess contributions between traditional and Roth contributions. You would think this scenario would be addressed somewhere. I hate to hit the taxpayer with additional taxes if there is an option to allocate the excess to his Roth contributions.

Thanks.

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1 hour ago, David said:

Thanks for your help.

I did read that link and it doesn't address allocating the excess contributions between traditional and Roth contributions. You would think this scenario would be addressed somewhere. I hate to hit the taxpayer with additional taxes if there is an option to allocate the excess to his Roth contributions.

Thanks.

It is addressed here, and be sure to read the entire page:

https://www.law.cornell.edu/cfr/text/26/1.402(g)-1

Edited by jklcpa
link wasn't active when first posted
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I really appreciate your help with this. I read through the whole page. Sorry to be a pain but...

Is this the section you refer to that addresses this issue? I bolded the part that appears to apply to my client's situation:

(a)In general. The excess of an individual's elective deferrals for any taxable year over the applicable limit for the year may not be excluded from gross income under sections 402(a)(8), 402(h)(1)(B), 403(b), 408(k)(6), or 501(c)(18). Thus, an individual's elective deferrals in excess of the applicable limit for a taxable year (that is, the individual's excess deferrals for the year) must be included in gross income for the year, except to the extent the excess deferrals are comprised of designated Roth contributions, and thus, are already includible in gross income. A designated Roth contribution is treated as an excess deferral only to the extent that the total amount of designated Roth contributions for an individual exceeds the applicable limit for the taxable year or the designated Roth contributions are identified as excess deferrals and the individual receives a distribution of the excess deferrals and allocable income under paragraph (e)(2) or (e)(3) of this section.

So it appears that the excess deferrals can all be designated as Roth contributions to both employer plans since the combined Roth contributions of $23,267 exceed the excess deferral amount of $22,534. Therefore, no additional income is reported as wages on the TP's 1040. Am I interpreting this correctly or am I off base?

I don't want the IRS to come back at a later time and assess the full $22,534 excess deferral as current year income.

I didn't see any section of the link that specifically addressed whether the excess deferral has to be allocated first to the pretax contribution before allocating any to the Roth contribution as the articles in my search indicated. The authors of those articles sounded so sure of this, however, I could never find anything in the tax regs that supported treating all excess deferrals as pretax contributions and then treating any remaining excess deferrals as Roth contributions.

Thanks for bearing with me on this.

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