Excess 401(k) contribution included in amount rolled over
Client left employer in mid-2006, and did a direct rollover of her 401(k) into an IRA in mid-July 2007.
In OCTOBER 2007 client received notification that $1,974 of the amount she contributed in 2006 was an excess contribution based on the compliance testing of the plan for 2006, and that because the entire plan balance was rolled over, she might have a problem with a portion of the rollover being ineligible.
When the forms were received, there were 2 1099-R forms. One for the corrected amount eligible for rollover (coded G for direct rollover) and one for the over-contribution amount, coded 8 (Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2007).
I looked up the rules and the indication is that when an excess contribution is not returned by the employer until more than 2 1/2 months after the end of the plan year, it is taxable in the year returned, not the prior year, so Code 8 putting it into 2007 does make sense.
However, given that this amount was included in the amount rolled over, it’s a potential problem because it was not eligible for a rollover.
When I prepared her return, the $1,974 went to Line 7 (Wages) where it belongs, not to the Pension line. The client has NO OTHER earned income for 2007. As a result, the software is allowing me to indicate that she made an IRA contribution of the same amount and is taking the adjustment for it.
Seems odd, but I can’t see anything wrong with it. Can anyone confirm whether or not this is permissible, or do we need to mess with a withdrawal of an excess amount rolled over?
Margaret A. Stallworthy, CPA
[email protected]
(602) 997-8951; FAX (602) 997-1854
301 E Bethany Home Rd. Ste A227
Phoenix, AZ 85012
Web site: http://www.mas-cpa.com
Permalink Submitted by Alan Spross on Mon, 2008-06-02 23:18
The regular contribution should work, but…,
This is correctly reported as an excess contribution and therefore the IRS will be looking at a rollover 5498 from the IRA custodian that is 1,974 higher than the G coded 1099R portion. That should produce a mismatch, but with the IRS software, who knows when?
The client could try to get the IRA custodian to recharacterize the $1,974 as a 2007 regular (or Roth if more beneficial) IRA contribution by submitting a copy of the 1099R forms and explaining the situation. While the 1,974 is not rollover eligible, since it will correctly appear on line 7, it could serve as the basis for a regular contribution per your software.
Client would also have the choice of requesting the return of the excess IRA contribution up to extended tax deadline, but in that case allocated earnings in the IRA since 7/07 would have to be distributed as well with earnings taxable and subject to penalty.
None of the 3 choices could be made without contacting the IRA custodian in order to generate reporting that matches the tax return. It would be best to try to deal with IRA custodian referral staff since the usual front line people will probably not understand the situation correctly. Then complete the tax return according to what they will do.