Return of $ from 401K due to failed ADP

Submitted by Janet Ulrich on Sat, 2013-05-18 09:35

My company failed the ADP test for 2012 (again) and HR has sent a notice that a portion of money will be returned from my 401K. I left the company and rolled over the 401k to an IRA in June of 2012. I have received no notice from the 401K company to this effect while others in the company who were notified of overpayment have received the overpayment. I assume this money needs to come out of my IRA (happens to be a Roth IRA from a Roth 401K). How do I go about letting the IRA account institution know how much to deduct? Is this so unusual that the 401K people don’t know what to do? My former HR Department is certainly confused.



Submitted by Alan - IRA critic on Sat, 2013-05-18 17:54

  • It is commonplace to have an excess contribution situation when employees leave and then roll the balance over to an IRA before the final calcs are completed by the plan. However, those contributions are usually to the pre tax account and not the Roth. It’s obvious that there is nothing in the plan to distribute to you and therefore no 1099R except the one you received for the rollover.
  • You DO have an excess contribution in your Roth IRA as a result of the rollover, but don’t rush into ordering a Roth IRA distribution until the plan provides a breakdown between your Roth deferrals and the earnings on those deferrals. In addition, if you made ANY pre tax deferrals to the plan, the plan provisions could allow for the excess contributions to be deemed from the pre tax deferrals first. 
  • Does the 1099R you already received show the full amount you rolled over and coded G? If so, ask the company if there will be an amended 1099R or another 1099R issued next January. If you can’t get an answer or the answer is that you will not get another 1099R, then order a corrective distribution from the Roth IRA as if the excess contribution made in the plan was an excess Roth IRA contribution which should be distributed to you with any earnings. Only the earnings should be taxable to you and subject to penalty (the penalty is due to the Roth IRA earnings, not the Roth 401k earnings).
  • If you have taxable income due to the earnings while in your Roth IRA, you will have to amend your 2012 return to include those earnings because the rollover was done in 2012.

Submitted by Janet Ulrich on Sat, 2013-05-18 18:52

Thank you so much for the reply.  In past years when this overpayment occured I received a 1099R coded ‘P” and did not amend my return.  Sometimes they alerted me a full year and a half after the fact and the code for overpayment has always been ‘P” when I receive the 1099’s the following January.   I have never paid a penalty.  The 1099R I received for 2012 was coded H for the 401KRoth money and G for the before tax bulk of the 401K so that part is nice and clean.All of my 401K deductions last year were after tax so I should only have to pay on the gain.  However, it’s been a pretty good 2013  so that gain which is taxable  is getting bigger and bigger. Thus I am interested in getting it out of there and putting it someplace better.The advice I had recieved in the past was that I did not have to amend past tax returns.  Is the fact that the money was moved to a new account make the difference in amending?

Submitted by Alan - IRA critic on Sat, 2013-05-18 23:02

With respect to prior year “P” coding on corrective distributions, this is the case for excess deferrals (over your individual limit), but not for excess contributions (discrimination testing) as you have now. Corrective distributions (only your earnings on Roth deferrals) are taxable in the year distributed, which due to your rollover is 2012 in this case. If the plan is not going to revise the 1099R form you already received and they probably will not, then the IRA rules for excess contributions take over since that is where the excess and earnings are now. Although earnings would NOT be penalized when distributed directly from the plan, having done the rollover of those earnings now makes them subject to penalty unless you had expenses that waive the penalty (eg higher education, medical etc). I agree that since those earnings are continuing to mount up, you should request the corrective distribution from your Roth IRA ASAP. It should be requested as a return of an excess contribution due to incorrect rollover information not available to you when you did the rollover. You will have to tell the Roth custodian the amount of the excess contribution as provided by your former plan including the earnings while in that plan. The Roth custodian will then calculate the amount of earnings on this amount back to last June that occurred in the Roth IRA, and that is the amount subject to tax and penalty. The rest of the excess is not taxable since it was a Roth 401k contribution. Since your Roth IRA excess was contributed in 2012, it requires that your 2012 return be amended to to include the taxable earnings and penalty unless the earnings are very small and would not affect your taxes. Therefore, this situation is very different from what you encountered in prior years.

Submitted by Janet Ulrich on Sat, 2013-05-18 23:40

There has been no excess deferrals on my part, ever.  The only time I have been sent money back from my 401K is when the company did not pass the discriminary testing.  Each time (at least 5 times over 7 years) the custodian (three different ones with same employer)  coded the 1099 with a “P”.  Hence my dismay.   True we aren’t taling about a great deal of money tax wise but I play it pretty close to the chest with taxes and don’t like the idea of a penaty over something I have no control. I wonder about compentecy all the time with both my former employer and any custodian.   I will wait no longer to hear from the 401K custodian and take action on my own.Thank you for being there Alan.  You know everything!

Submitted by Alan - IRA critic on Sun, 2013-05-19 03:16

  • I think the explanation for those prior “P” codes is that prior to 2008, the income was added to wages in the year of the contribution and that would trigger the P code. Starting in 2008, the distribution of excess contributions from the plan was included in income in the year of the DISTRIBUTION, and the P coding would not apply unless the testing occurred very late. Nonetheless, your custodians may not have caught this change and continued the P codes after the change occurred in 2008.
  • There is no stated reporting procedure for your situation. If you had a meaningful amount of earnings while still in the Roth 401, you might report those taxable earnings on line 16a and 16b where they would not be subject to penalty. I did not mention this before since it would make things more complex than they already are, but this is probably the more technically correct approach. But there is nothing unless you have a penalty exception as noted earlier to avoid the penalty on the earnings generated in the Roth IRA from 6/12 to the present on the amount yu rolled into the Roth IRA.
  • Remember to make a note to yourself that the H coded 1099R indicates the amount of your Roth 401k contributions in Box 5 that would be treated as regular Roth IRA contributions in your Roth IRA. However, the removal of the excess Roth IRA contributions reduces this figure by the amount of the excess (without earnings) since you are having to withdraw it from the Roth IRA. This is for future accounting of your Roth IRA in the event you ever take non qualified Roth IRA distributions in the future.

Submitted by J U on Mon, 2013-08-05 01:14

I received a corrected 2012 1099R from my old 401k provider recently for the excess contribution to my Roth 401k.  This account was rolled over to a new provider in July 2012 in the form of a Roth IRA which all ready existed for 5+ years.  The amount that is taxable from the old company is $35.  This is about $10 Fed and $2 State tax due. The current custodian holding the Roth IRA deducted the amount using the 1099 as the guide and calculated the gain in that account since receiving the roll over from the 401k company to date.  The taxable amount is around $350.  They will issue a 1099 in January coded “P” prior year.  I calculate owing Fed Tax of about $100 on the total gain. Should I amend now (before Oct) using both the gain amounts even though I don’t have a 1099R from the Roth provider yet? If I do that what do I do about the 1099R that I receive next year in January?  PS I am the same poster as below/above.  Had to create a new account.

Submitted by Alan - IRA critic on Mon, 2013-08-05 18:40

  • First, for the revised 1099R from the company plan, what code is in Box 7? Originally, I believe you received two 1099R forms for the rollovers, one coded G and another coded H (the Roth portion).  The new 1099R apparently intends to flag a portion of one or both of the earlier forms as an excess contribution, but it would be nice to know if they plan to also revise the earlier forms. 
  • With respect to the Roth IRA rollover, if you have the corrective distribution from the Roth IRA, you could amend 2012 to indicate the taxable earnings, but no sense in doing that until you have all the info from the employer plan to determine what amendments may be needed for that. You don’t want to amend now for the Roth IRA distribution when you may also have to amend for the employer plan if they are not done issuing 1099R forms. Amending prior to the 1099R next January is not a problem once you have all the info.
  • Did you get any matching contributions for your Roth 401k deferrals? These would have been made to the pre tax 401k account and therefore included in the G coded 1099R. As I indicated in earlier post, there is limited guidance on how to correct this and whether some of the matching contributions will be considered excess in your rollover TIRA account (the G coded), so it is important to know whether the plan is done issuing 1099R forms.

Submitted by J U on Mon, 2013-08-05 20:43

It has been quite the ordeal getting information from anyone involved with this situation.  In answer to your first question, box 7 shows code 8B.  The other corrected 1099R just received in coded H.  These forms correct the two forms sent in January.   It is only after certified mail requesting these forms that I even have these.  (They had sent forms earlier that were just so wrong I can’t even explain it here).  There is no cover letter included and of course no appogy for my work or yours. Based on your reply, I plan to send the amended return tomorrow for the $9 along with a cover letter and the letter from Fidelity stating they distributed the funds and are no longer in my Roth IRA account. In my letter to the IRS I am stating that the gain from the excess contribution after leaving the 401K to the date of disbursement will be filed with my 2013 taxes since Fidelity will be sending a 2013 1099 P code in January.  (To alert them just in case)  I did not get a match because I left the company mid year and the new rule is you must be employed the full year to get the match, so no issues with the pretax 401k.  All of the above is what I assumed should happen but due to some mix up no one will admit to,prolonging my efforts and causing me  to question my sanity, I am able to move on to enyoing the summer.  I hope your day is as good as mine is today.  Thank you Alan.  Does everyone want to hire you?  Now, if I can get the CAPTCHA math question right, I should be done and done.  

Submitted by Alan - IRA critic on Tue, 2013-08-06 00:54

 The Roth IRA part is simple and straighforward. The earnings on the corrective distribution are taxable on the 2012 amended return (and subject to 10% penalty unless you are 59.5), which concurs with a P coded 1099R for 2013 which you will receive in January. You would NOT include any portion of the IRA corrective distribution on your 2013 return since the P code correctly assigns the numbers to 2012.

  • The taxable amount in Box 2a on the recent 1099R should also be included on the amended return for 2012. Again, none of this will go on your 2013 return since it does not apply to 2013.

Submitted by J U on Wed, 2013-08-07 16:35

Thanks for your patienceThe Roth IRA part is simple and straighforward. The earnings on the corrective distribution are taxable on the 2012 amended return which concurs with a P coded 1099R for 2013 which you will receive in January.  HOW DO I REPORT THIS NOW WITHOUT A 1099R? 

Submitted by Alan - IRA critic on Wed, 2013-08-07 19:18

You can tell what the figures will be from your distribution statement for removing the excess contribution. The excess of the amount received over the amount of the excess contribution will be the earnings that are taxable on the 1040X for 2012. There is also a 10% penalty on the earnings unless you are 59.5+. Include an explanatory statement on the 1040X regarding the excess contribution and the corrective disrtribution. Then when the 1099R is issued it should concur with what you reported and you can just attach it to your copy of the 1040X.

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