How To Fix Excess 401k Elective Deferrals after Return Due Date
Taxpayer had maxed out elective deferrals in 403b at job. She also had consulting income. She set up solo 401k in 2011. Put $15,000 in elective deferrals and employer contributions in it on 2011, and $6,000 in 2012. I believe all contributions were coded by the plan as elective deferrals, none coded as employer contributions.
I think 403b and 401k elective deferral limits are combined so she is over limit both years.
Does she need to amend 2011 and 2012 to remove deduction for elective deferrals?
I think she needs to remove elective deferrals, and income earned on them, in 2013.
My preliminary research indicates the amounts distributed in 2103 will be included in income even though there was no deduction for them. This doesn’t seem right. Wouldn’t they now be after-tax contributions? So either not included in income at all when distributed in 2013, or would have a basis of the amount of the contributions since the contributions were already taxed? Either way it seems the distributions would not be taxable in 2013. I cannot find any information on this.
Also, can the employer contributions stay in the 401k even though they were incorrectly coded by the plan?
I’d appreciate any help anyone can provide with this issue, or if anyone can direct me to any pubications/guidance on this. Thank you in advance.
Permalink Submitted by Alan - IRA critic on Wed, 2013-11-06 18:47
Since the deadline for timely distributions of the excess deferrals is long since past, she should leave them in the plan. Her 2011 and 2012 returns need to be amended to eliminate the deduction for these excess amounts. She will get no basis for these contributions meaning that they will eventually be taxed a second time when they are withdrawn in retirement if not sooner. If she removes the contributions now, she will just be taxed the second time that much sooner than if she just left them in. If there is any good news, leaving the excess in will generate more tax deferred earnings in the long run. She would have had to remove the excess by 4/15 of the following year with earnings to avoid the eventual double taxation. This is described in Pub 525 under “Excess deferrals” on p 10: http://www.irs.gov/pub/irs-pdf/p525.pdf. The employer contributions can also stay in the plan, as employer contributions are permissible even if employee does not qualify for elective deferrals due to the limits.
Permalink Submitted by John Shipley on Thu, 2013-11-07 17:07
Thanks Alan-iracritic. I’ve read some items on the IRS website that seem to indicate leaving the excess deferrals in the plan will cause the plan to become disqualified, so I’m wondering if the excess deferrals should be taken our right now rather than letting them stay in the plan? Thanks for your hel.
Permalink Submitted by Alan - IRA critic on Thu, 2013-11-07 17:58
Sec 401(a)(30) refers to plans of a single employer. In this case, the plans are for different employers, the one sponsoring the 403b and the taxpayer for the consulting work. Note that if the distribution occurs prior to 59.5, there is a 10% penalty due as well as the second year of ordinary income taxes. But if she will sleep better at night, she certainly should remove the excess, but I do not believe there is a disqualification threat here since the excess is not derived from a single employer’s plans.
Permalink Submitted by John Shipley on Fri, 2013-11-08 21:47
Thanks Alan – thta’s really helpful. I appreciate it.