Late notification of 401k excess contribution (due to HCE test) after rollover to IRA
During Jan-Mar 2012, I contributed the full amount of $16,500 into the company 401K.
The job terminated unexpectedly in Apr 2012.
I rolled over the entire amount of $16,500 into an IRA in Oct 2012.
In early March 2013, I received a letter from the old job that due to failure of the Actual Deferral Percentage Test, I was deemed HCE (Highly Compensated Employee), meaning that my 401K contribution limit for 2012 was only $7,500.
In late March 2013, I received a 1099R for tax year 2012, from the old 401K holding institution which stated $9000 in box 1 (gross distribution), and $9000 in box 2 (taxable amount) and distribution code of 8 in box 7.
My understanding is that the 1099R for tax yr 2012 is technically incorrect since I never got that distribution in 2012.
Howver, my reasoning failed to satisfy my old 401K holding institution (Wells Fargo) as they said that $9000 was ineligible to be rolled over into IRA, and they’re standing by their 1099R to be correct.
I have not yet taken the money out from my IRA, and it’s 2 weeks from Oct-15-2013 to file my 2012 taxes.
My problem – if I don’t take a distribution of $9000 from my IRA, then I get taxed twice, as I’ll have to pay taxes on the $9000 amount again when I take it out after retirement.
If I take a distribution of $9000 now, how should I request it? As a withdrawal of excess contributions for tax year 2012?
If I do take a distribution as withdrawal of excess contributions for tax year 2012, will my IRA holding insititution issue me another 1099R? And will it be
for 2012 or 2013? And can I submit to them the old 1099R from old 401K holding institution, with exact same amount so the old IRA holding institution does not issue me
a new 1099R?
No one in the old 401K holding institution is willing to talk to the new IRS holding institution, even though they are both the same company (WF).
Any advice is highly appreciated.
Thanks in advance!
Permalink Submitted by Alan - IRA critic on Wed, 2013-09-25 20:42
This scenario is actually fairly common due to the delay in identification of excess plan contributions. The touchy part is reporting in such a way that you do not get taxed twice. Technically, since the 9k was not eligible for rollover, it’s an excess IRA contribution that must be corrected, and that will produce a 1099R from the IRA in addition to what you already have. The IRA custodian may ask you for documentation to confirm the situation, ie your excess is due to incorrect rollover information first released by the plan when you rolled over the full 16.5. The IRA custodian must also calculate the earnings or loss on the 9k from 10/2012 to the day the corrective distribution is processed. Since this excess IRA contribution was made in 2012, any earnings on that amount will also be taxable on line 15b of your 2012 return. You should start now to get the IRA corrective distribution processed so you will have the earnings amount for your 2012 return. Before proceeding further, I need to know what they plan issued for the original direct rollover 1099R which showed 16,500. Was that 1099R corrected to show 7,500 instead of 16,500? It should have been.
Permalink Submitted by Raj K on Thu, 2013-09-26 03:14
Firstly, thanks a lot for the prompt response.I was issued 2 1099R forms for tax year 2012 from the old 401K holding institution.1) $9000 in box 1 (gross distribution), and $9000 in box 2 (taxable amount) and distribution code of 8 in box 7.2) $7500 in box 1 (gross distribution), and $0 in box 2 (taxable amount) and distribution code of G in box 7. I called IRS today, ans they said I should get the excess contribution of $9000 out from my present IRA before Oct-15-2013, and have the new IRA holding institution process it with distribution code of P, when they issue a 1099R for tax year 2013, to ensure that I don’t get taxed twice. Thoughts?
Permalink Submitted by Alan - IRA critic on Thu, 2013-09-26 04:26
It is good that your 1099R forms add up to the 16,500 that was distributed. I agree with the IRS advice regarding immediate correction of the IRA excess contribution of 9,000 plus earnings. The P code accurately reflects that this should be reported on your 2012 return. Your 2012 return should show 16,500 on line 16a; 9,000 on 16b with “rollover” entered next to 16b. Then for the IRA excess contribution correction, you would show the full amount distributed (9,000 plus earnings on line 15a with only the earnings amount on 15b. If under 59.5, you also owe 10% penalty on the earnings amount, and you can enter the 10% directly on line 58 of Form 1040. This would complete the tax reporting, and your 2013 return would not be affected by any of this. The main challenge is to get the IRA custodian to understand why you are asking for the corrective distribution so they ONLY show the earnings as taxable in Box 2a of the 1099R, not the 9,000 since you already are paying taxes on that per line 16b.