401k excessive contribution
Hello,
I was told I had excessive contributions to my 401k and received checks back from fidelity investments in March (based on 2007 contributions).
In the paperwork it says:
Please keep this report for your records. it has been determined that you had an excess contribution in the above referenced retirement plan for the 2007 plan year. Under IRS regulations, this excess contribution must be returned to you along with related earnings. Please be advised that the full amount of this corrective distribution is taxable to you in 2007. In january of 2009, you will receive an IRS Form 1099-R reflecting this correct distribution.
First off this seems crazy..if it’s taxable in 2007 why would they give me paper work in 2009?????
I was told by our HR people that I must add it to my 1040 form.
I’ve read publication 529 which states:
[quote]If you are a highly compensated employee, the total of your elective deferrals and other contributions made for you for any year under a section 401(k) plan or SARSEP can be, as a percentage of pay, no more than 125% of the average deferral percentage (ADP) of all eligible non-highly compensated employees.
If the total contributed to the plan is more than the amount allowed under the ADP test, the excess contributions must be either distributed to you or recharacterized as after-tax employee contributions by treating them as distributed to you and then contributed by you to the plan. You must include the excess contributions in your income as wages on Form 1040, line 7. You cannot use Form 1040A or Form 1040EZ to report excess contribution amounts.
If you receive excess contributions from a 401(k) plan and any income earned on the contributions within 2½ months after the close of the plan year, you must include them in your income in the year of the contribution. If you receive them later, or receive less than $100 excess contributions, include the excess contributions and earnings in your income in the year distributed. If the excess contributions are recharacterized, you must include them in income in the year a corrective distribution would have occurred. For a SARSEP, the employer must notify you by March 15 following the year in which excess contributions are made that you must withdraw the excess and earnings. You must include the excess contributions in your income in the year of the contribution (or the year of the notification if less than $100) and include the earnings in your income in the year withdrawn.
You should receive a Form 1099-R for the year in which the excess contributions are distributed to you (or are recharacterized). Add excess contributions or earnings shown on Form 1099-R for 2007 to your wages on your 2007 tax return if code “8” is in box 7. If code “P” or “D” is in box 7, you may have to file an amended 2006 or 2005 return on Form 1040X to add the excess contributions or earnings to your wages in the year of the contribution. [/quote]
doesn’t really help because i didn’t get a 1099-R.
Anyone know what I’m really supposed to do?
This is upset me in so many ways…(a) i got money back, (b) i can only add about 5,000 to my 401k because of these regulations, (c) don’t qualify for roth ira (or at least that’s what i was told).
Thanks in advance for any help.[/quote]
Permalink Submitted by Alan Spross on Sun, 2008-03-30 01:47
This is a routine occurrence, and rather frustrating because you as an employee have no control over other participation rates of lower paid staff. Federal tax code law requires this distribution to reduce the amount of contributions by higher paid staff to the required portion of the total. All you can do is deposit the checks into your taxable account.
The copied instructions were from Pub 525. You must add the returned amount to line 7 of your Form 1040, the same line as your salary. That will make it taxable, but there are no penalties involved.
Since this activity took place in 2008, it cannot be included on the 1099R you received in January for 2007. But it will show on the one you get next January with the code P meaning that it (was) taxable in 2007. You can then ignore that 1099R that you get next year.
So this is very easy to report. The main downside is that you will be taxed on income that you expected to defer taxes on until retirement.
Permalink Submitted by John Worthington on Wed, 2008-04-02 17:04
[quote=”[email protected]“]This is a routine occurrence, and rather frustrating because you as an employee have no control over other participation rates of lower paid staff. Federal tax code law requires this distribution to reduce the amount of contributions by higher paid staff to the required portion of the total. All you can do is deposit the checks into your taxable account.
The copied instructions were from Pub 525. You must add the returned amount to line 7 of your Form 1040, the same line as your salary. That will make it taxable, but there are no penalties involved.
Since this activity took place in 2008, it cannot be included on the 1099R you received in January for 2007. But it will show on the one you get next January with the code P meaning that it (was) taxable in 2007. You can then ignore that 1099R that you get next year.
So this is very easy to report. The main downside is that you will be taxed on income that you expected to defer taxes on until retirement.[/quote]
This won’t cause any kind of red flag because the numbers don’t add up to what’s on my w2s? i just add the extra to line 7?
just double checking.
Permalink Submitted by Alan Spross on Thu, 2008-04-03 03:40
Yes. just add it to line 7. The 1099R that is issued next January will be coded to confirm that the amount shown belongs on your 2007 1040 line 7. See the 1040 Inst, last point on p 18.
Permalink Submitted by Kristine McKinley on Fri, 2008-04-04 00:35
To continue this conversation…
I have a client who received a check in 2007 and didn’t tell me about it. Now he’s got a 1099-R with code P in box 7.
Do I need to amend his 2006 tax return, or can I report it on 2007?
Thanks.
Permalink Submitted by Alan Spross on Fri, 2008-04-04 03:15
You need to amend 2006 since the amount coded P is taxable in the prior year (2006).
Permalink Submitted by Kristine McKinley on Sat, 2008-04-05 02:17
That’s what I was afraid of, but thanks for confirming it for me.