One of my clients has two jobs with different employers. He contributed the max to employer A’s 403B plan and also contributed the max to employer B’s plan. My questions:
The deferral limit is per person and not per employer, right?
If per person, what does he need to do to rectify the overcontribution and is there any penalty relief?
There will be eventual double taxation. The deadline for removing an excess elective deferral for 2018 was 4/15/2019. SInce the 2018 W-2 forms will total more than the elective deferral limit, tax programs will calculate 2018 tax based only on the allowed deferral, taxing the excess amount. Because the excess was not returned by the deadline, no effort to make a distribution should be made now, as that would just accelerate the taxes. Rather, leaving the excess in until it eventually comes out later when needed or as RMDs will delay the second tax bill for a long time as the excess generates compounded earnings over the years. Therefore, as long as the 2018 return was filed correctly, there should be no other action taken. So while the second tax will be due long down the road, in the meantime the extra contributions continue to grow tax deferred, and long term client may come out OK. To be clear, the excess was not pre tax, but it does NOT add any basis to the 403b accounts.
One of the contributions was pre-tax with Code E in box 12 and the other was post-tax contribution with Code BB in box 12. My software (Drake) did not calculate any tax on the excess contribution. Thus, I believe i need to have him take a withhdrawal from the post-tax account. Does that seem correct? Note: The employer does not allow excess contributions by the employee. if I am correct, what is the process for taking the withdrawal?
Thanks to both Alan and Spiritrider for the replies. In I.R.C. § 402A(d)(3)(B) it says, “be included in gross income for the taxable year in which such excess is distributed.”My reading of that is that I should have him take out the excess contribution to his ROTH account and count it in income for 2019 (the year of distribution). However, it seems both of you think that is not required. Am I misreading the language in 402A?Thanks again for your replies – very helpful!John
That section makes no indication WHEN such excess should be distributed or how it would be integrated with qualified distributions or other NQ distributions. The plan would have to agree to track this amount as an excess Roth deferral and determine IF it can be distributed before 59.5 or not and how to complete the 1099R properly. In other words, the tax code leads to a dead end since there are no Regs dealing on how to properly handle this this or code the 1099R. Should the client ask for a distribution of the excess amount, no telling how the 1099R would be coded. Obviously, the full distribution should be taxable since the excess is not basis in the designated Roth. The only 1099R code available for this is Code B. E does not seem to apply, nor does the corrective codes of 8 or P, which apply when earnings are also returned by 4/15. Of course, the client could also discuss this with the plan administrator to see if they actually have a formal procedure for addressing all these issues including a 1099R that will not trigger IRS issues.
There is substantial authority that the removal of an excess contribution after the 4/15 deadline can only be done by an otherwise distributable event. In normal circumstances, that can only occur at age 59 1/2 or at separation.
Permalink Submitted by Alan - IRA critic on Wed, 2019-10-23 19:35
Yes, the elective deferral limit is per employee. What year was this for? Hopefully 2019?