Really Late Notification of 401k corrective distribution (due to HCE test) after rollover to IRA

Submitted by Alex Song on Thu, 2019-01-03 09:18

I left my previous employer in 2017 and rolled over the 401k plan (Transamerica) to an IRA (Schwab) in 2017. I just got notified in December of 2018 by Transamerica about a corrective distribution (due to HCE test) from the 401k plan for the 2017 year and received 2 1099-R forms. The 1099-R forms are coded “8” and “G”. I went ahead and amended my 2017 tax returns to reflect these newly received 1099-R’s and paid additional federal and state taxes along with the amendment.

How do I go about backing out the corrective distribution from the IRA (Schwab) that I rolled the 401k into?

My understanding is that I need to back out both the corrective distribution amount (around $7k) as well as associated gains since rolling it over to the IRA and that the $7k will be tax-free (since I already paid tax on it with my 2017 amended tax return) and the associated gains (if any) will be subject to taxes in the 2019 year as well as the 6% penalty.

I called my IRA custodian (Schwab) and they said they can only distribute and issue a 1099-R for the 2019 year with code “1”. This doesn’t seem right to me as a 1099-R with code “1” means I will be taxed again in 2019 with a 6% penalty on the whole amount.

Any advice is highly appreciated.

Thanks in advance!



Submitted by Alan - IRA critic on Thu, 2019-01-03 16:52

  • Neither you or Schwab is totally correct. Sounds like your 2017 1040X is correct, but the excess IRA contribution was caused by “incorrect rollover information” reflected on the initial 401k direct rollover 1099R. What should be requested from Schwab is a distribution of excess contribution without earnings after the due date of the 2017 return per Sec 408(d)(5). Schwab distributes the exact amount of that 8 coded 1099R (no earnings) and will report that on a 2019 1099R Code 1, but the taxable amount in Box 2a should be blank. This will eliminate double taxation of the 7,000., althought the 1099R must be reported on the 2019 return, line 4a.
  • However, there is still the issue of the excess contribution 6% excise tax for both 2017 and 2018. The 2017 5329 can be filed alone, and the 2018 5329 can be added to the 2018 return. The excise tax and distribution of earnings on the IRA excess are mutually exclusive, so the excise tax is due but earnings remain in the IRA.

Submitted by Alex Song on Wed, 2019-02-13 00:24

Thank you for your response. I would like to clarify on the 6% excise tax.Here is my understanding, please correct me if I am wrong.1. The 6% excise tax only applies to the earnings on the IRA excess and will not apply if there are no earnings.2. I need to ask Schwab to calculate the earnings on the IRA excess separately for 2017 and 2018 but leave the earnings itself in the IRA.3. If the IRA excess is distributed in 2019 then I don’t need to pay the 6% excise tax anymore for 2019 and beyond. Is there a deadline for the IRA excess distribution for 2019?

Submitted by Alan - IRA critic on Wed, 2019-02-13 04:02

  1. The IRA 6% excise tax for 2017 and 2018 applies to the entire amount contributed from the 8 coded 1099R, as that amount was not eligible for rollover. It is not charged on the earnings.
  2.  Earnings on the excess IRA contribution remain in the IRA and therefore are not subject to current tax or penalty, and need not be calculated when the excess is withdrawn after the due date. The 6% excise tax is mutually exclusive from the withdrawal of earnings.
  3. This is correct. There is no excise tax due for 2019 as long as the excess amount is withdrawn by the end of 2019. It is better to leave the excess in until late 2019 so it can generate additional earnings which remain in the IRA. Just be sure not to forget to remove the excess by year end or it will incur another 6% charge for 2019.

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