Excess 410(k) contributions for HCE

Submitted by Greig Siedor on Tue, 2014-02-18 23:54

I could use some advice on an issue of excess contributions. I contributed the maximum to my employer’s 401(k) during 2012. In May 2013, I retired and, in September 2013, rolled over the entire amount of my 401(k) to my IRA administrator. In January 2014, I received a letter from the 401(k) administrator stating that the former employer’s 401(k) plan failed its HCE/NHCE test for tax year 2012 and telling me I had been determined to have contributed $6600. too much. However, because the full value of the 401(k) had been rolled over, they said they had nothing they could return to me as an excess contribution. The 401(k) administrator has now issued me a tax year 2013 1099-R with the $6600 as a taxable distribution in 2013 (even though I obviously received no such distribution in 2013). I worked with the IRA administrator to remove the $6600 from the IRA as soon as I knew, but that distribution didn’t happen until January 2014. Complicating the matter is the fact that the IRA administrator would not withdraw the earnings (from September to the end of 2013) on the $6600. I now face the possibility of having to pay income tax on the $6600 for tax year 2013 (because of the 401(k) administrator’s 1099-R) and for tax year 2014 (because the IRA administrator will have to give me a 1099-R for the distribution that took place in January 2014). Another fear I have is that I will pay a 6% tax on the $6600 because I didn’t withdraw it from the 401(k) or IRA until after the end of 2013. Any thoughts on how I (a) avoid paying on the $6600 twice, (b) avoid any 6% penalty for not having withdrawn the $6600 during tax year 2013 and (c) convince my IRA administrator to return the earnings on the $6600 from September 2013 to 12/31/13? Thanks!!



Submitted by Alan - IRA critic on Wed, 2014-02-19 01:21

This happens fairly often and can be resolved. You will not have to pay twice on the 6600 or pay the 6% excise tax, but I have some questions:

  1. Did the plan also re issue the 1099R for the original rollover (coded G) to reduce the amount by $6600?  They should.
  2. What is the Box 7 code on the 1099R for the 6600?
  3. Did you ask the IRA custodian to treat the 6600 as an excess IRA contribution? That is required for the eventual 1099R coding to be correct. The earnings should be small, but you would have to report the earnings as taxable income.

Submitted by Greig Siedor on Wed, 2014-02-19 15:38

Thanks very muich for your response.  Here are the answers to your follow-up questions:1.  The 401(k) administrator has issued two tax year 2013 1099-R forms, one of the excess contribution amount ($6600) and the second for the balance of the roll-over.  The 1099-R for the balance does have a code “G” in Box 7.2.  The code in Box 7 of the 1099-R for the $6600 is “8” (“Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2013”).3.  I am checking with the IRA administrator on the their 1099-R on the distribution of the $6600, although they were aware that I needed to withdraw the money because of it being characterized as an excess contribution.  However, the IRA administrator has advised me that “to avoid a 6% federal penalty tax, you must remove the excess contribution by the applicable correction deadline,” which in this case was October 15, 2013.  They also state that “If you remove the excess contribution after the applicable correction deadline, the earnings stay in your account and the excess principal is generally subject to a 6% federal penalty tax each year it remains in your account. The penalty tax also applies to the year for which the excess was contributed.  Because earnings stay in the account, [we] will not calculate any earnings on the excess.”This information/advice adds up to my concluding I am going to be hit with a 6% tax for tax year 2012 and a second 6% tax for tax year 2013 for this excess contribution.  And, I still not sure how to report all this on my tax form.  Any ideas or thoughts? Again, my gratitude for your input!

Submitted by Greig Siedor on Wed, 2014-02-19 18:15

By way of further follow-up, I spoke again with the IRA administrator about what the 1099-R will say about the $6600 distribution made from my IRA in January 2014.  I am told it will have the number “7” in Box 7 (i.e., “normal distribution”).  It will be my responsibility to explain the situation to the IRS in my 2015 tax filing (for tax year 2014).

Submitted by Alan - IRA critic on Thu, 2014-02-20 03:56

  • Everything seems to be in order with respect to the plan 1099R forms. However, the explanation from the IRA custodian makes no sense. The excess contribution to the IRA was made in Sept, 2013, so there is plenty of time to correct the excess contribution to the IRA. They are a year short on the time allowed to correct the excess using the usual method with an earnings calculation. They appear to be treating the IRA contribution as being for the 2012 year, but the year of the plan testing failure has nothing to do with the year the excess was contributed to the IRA. They need to re process the corrective distribution which should be easy for them since they have not issued the 1099R yet. Are your dates in your original post all correct?
  • There should be no 6% excise tax if they re process the corrective distribution, but there might be some earnings added to it that would be taxable in 2013. Eliminating any double taxation can be done by attaching an explanatory statement with your 2013 return.
  • Note that if you are eligible for a TIRA contribution for 2013 (not yet 70.5) that you did not make, most of the 6600 could be applied as a new contribution, although it probably would not be deductible. Since you already have that money, it might be difficult to make that adjustment even if you wanted to. You will probably have to talk to supervisory level staff at the IRA custodian to get past the resistance they normally have to re processing the distribution. But again, the problem appears to be caused by the custodian thinking that the testing failure year applies to the corrective IRA distribution.

Submitted by Greig Siedor on Fri, 2014-02-21 00:42

Thank you very much for this advice.  I am going to discuss your views with the IRA administrator as soon as possible.  Again, my thanks!!

Submitted by Alan - IRA critic on Fri, 2014-02-21 01:59

Let us know what the resolution will be and then we can get into how to report all this.

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