Excess contribution to 401(k), then rolled over to TIRA, how to correct?

Submitted by Julian Mehnle on Mon, 2022-12-19 05:54

I had a (“first”) 401(k) with an employer for several years, but the employer shut down operations in March 2022, and this 401(k) was subsequently (and unbeknownst to me at first) rolled over into a traditional IRA with a different plan administrator. Now it turns out I over-contributed to the 401(k) in 2022, but since the original plan administrator no longer controls any of the funds they told me they cannot issue a corrective distribution. Furthermore, the excess contribution is due to my contribution to another 401(k) in 2022 that the first 401(k)’s administrator knows nothing about. Is my understanding correct in that I need to ask the administrator of the first 401(k) to issue two 1099-R with codes G (for the allowable amount rolled over into the IRA) and 8 (for the excess amount that should not have been contributed) instead of just one 1099-R with code G (for the entire amount rolled over)?

I believe I also need to ask the administrator of the IRA to issue a distribution as the excess 401(k) contribution was not eligible for rollover into the IRA to begin with, but what kind of distribution do I need to request here, and what 1099-R would they have to issue in order to match the situation? A complication here is that I don’t yet currently have documentation of the excess IRA contribution to show to the IRA administrator. Will I be able to correct this situation only next year (2023) once I have the 401(k) 1099-Rs in hand?

Thanks in advance for your time and expertise.



Submitted by Alan - IRA critic on Mon, 2022-12-19 15:01

  • You are describing an excess elective deferral in which you exceeded the 20,500 deferral limit that applies to all your deferrals for the year. If so, you have a choice. You could request the second plan to return the excess adjusted for gain or loss or if they will not do this, you will leave everything as is. Regardless of whether the excess is returned or not, tax programs will pick up the excess from your W-2 forms and include it in 2022 taxable income as wages. Your balance will remain pre tax which means that eventually when you take distributions you will be taxed a second time, possibly not until your RMDs start. If the second plan agrees to distribute your excess by 4/18/2023 and there are earnings, those earnings will be taxable for 2023, but due to investment results this year, you probably have a loss, and will get back somewhat less than the excess. You would not involve your IRA account in this situation.
  • So your choice is whether to request the correction from the second plan if the excess is modest or do nothing. 2022 taxes will be the same either way. But even if you request the return of excess, the second plan is not required to comply with your request. If you leave the excess in the second plan, decades of tax deferred gains on that excess amount might offset the eventual double taxation.

Submitted by Julian Mehnle on Tue, 2022-12-20 05:17

Thank you for your reply. Apologies, but I forgot to mention that the second 401(k) plan comes with substantial employer matching (unlike the first), which is why I prefer not to ask for a return from the second plan, but instead would rather have the first plan return the excess, which of course isn’t strictly possible due to its rollover into an IRA that has already happened. My question is whether this situation can be healed by treating the deferral on the first (now dissolved and rolled-over) 401(k) plan as the excess deferral and asking the IRA administrator to issue a distribution due to a partially ineligible rollover? Additionally, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-what-happens-when-an-employee-has-elective-deferrals-in-excess-of-the-limits states under “Excess not withdrawn by April 15”: “… if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan.” — If I choose to do nothing (not my preferred option!), will this put the qualified status of one of my plans at risk?

Submitted by Alan - IRA critic on Tue, 2022-12-20 14:21

The potential loss of qualified plan status refers to excess deferrals in a single plan. In that case, the plan is required to distribute the excess. But in your situation the excess was caused by the total deferrals in both plans combined without a single plan excess. In that situation, a plan may but is not required to distribute the excess. The first plan will almost never cooperate in this situation, particularly if you have already rolled out the funds. The first plan would have to agree to issue the 2 1099R forms as you described in your original post, which they almost certainly will not do, but you could always ask. Receiving the 8 coded 1099R from the first plan would make that portion of the IRA rollover into an excess contribution which you would have to remove. SInce the IRA contribution was a rollover you cannot treat it as excess unless you can show that the funds were not eligible for rollover as indicated by the code 8 1099R, which you would not have in January unless the plan acted prior to year end after which they will begin to prepare 2022 1099R forms.  If you got a large enough match in Plan 2, just leave the excess in that plan. You are going to be taxed on the excess as wages in 2022 whether it is treated as returned or not. 

Submitted by William Tuttle on Tue, 2022-12-20 15:06

  • Excess deferrals for a year must be returned be returned from a plan that received deferrals for that year.
  • Since removal of excess deferrals to multiple plans is voluntary on both the participant and the plan. The rollover of the first 401k balance is not an excess contribution to be removed. No distribution from the IRA cures the defect.
  • Your quoted reference does not apply. As Alan pointed out, a plan is not required to remove excess deferrals to multiple plans. It is only responsible to ensure deferrals to its plan does not exceed the limit.
  • A plan must remove excess deferrals solely to their plan by April 15th of the following year. Failure of a plan to enforce the employee deferral limit in their plan is a serious plan error and if not removed by April 15th can result in disqualification.

Submitted by Julian Mehnle on Wed, 2022-12-21 04:17

Thank you both for your replies. Your expertise is much appreciated. I have decided to leave the excess deferral in my 401(k)s, report the excess as income for 2022, and swallow the double taxation on ultimate distribution. Unfortunate, but I believe I’ll still be slightly better off than giving up on the employer matching on the second 401(k).

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