Excess Employer Match – 401K – 1099 Corrected – Code E
In 2021 – I contributed $26,000 to my 401K. (over 50). I left the company the same year.
After leaving I rolled over the 401K to a self directed IRA Brokerage account.
I received a 1099-r with code G in Feb and filed my taxes (no tax impact) based on that 1099-r.
Today I received two corrected 1099-R’s.
One with an $8800 distribution with a Code E . One with the total – $8800 with a Code G.
I am assuming this $8800 is due to an excess match. The company matched my $26,000 – dollar for dollar, because they did not take into account the 6% match with the maximum allowable earnings for the maximum match.($17,400). (26,000-17400 + earnings = 8800) No communication has come from the 401K administrator or the prior employer.
Having read other posts – I am looking to confirm next steps and if I am missing anything.
1) I need to redo my 2021 taxes and report this extra income
2) I am not sure what I need to do with my rollover self directed IRA. It would seem based on other posts – I may need to ask for the $8800 to be withdrawn.
2.1) If I ask Schwab ( custodian for the IRA) to withdraw the $8800 – I need to request this distribution under Sec 408(d)(5).
(will they even know what this is – do I need to deal with someone special) This should produce no income in 2022.
3) Anything Else??
Thanks a lot for the help – and the information provided so far on the forums!
Permalink Submitted by David Mertz on Fri, 2022-05-20 18:10
1) Yes, the $8,800 must be reported as income.
2) The $8,800 deposited into the IRA must be treated as a regular contribution, not as a rollover contribution because the $8,800 ended up being ineligible for rollover. Assuming that you made no IRA contributions for 2021, you could treat $7,000 of that as a regular, perhaps nondeductible contribution, but that would still leave you with a $1,800 excess contribution. Assuming that the filing of your 2021 tax return was timely, you have until October 17, 2022 to obtain a return of contribution before the due date of your 2021 tax return of up to the full $8,800, with the amount distributed being adjusted for investment gain or loss of the account while the $8,800 was present. This will require explaining the situation to Schwab to get them to treat the $8,800 as a regular contribution instead of as a rollover.
2.1) This distribution would be under section 408(d)(4) pursuant to section 301.9100-2, not section 408(d)(5). If there are any investment gains included in this distribution, the gains will be taxable on your amended 2021 tax return. Nothing of this will be reported on your 2022 tax return.
If you choose to correct the excess in 2022 after October 17, 2022, whatever amount is an excess contribution would be subject to a 6% excess-contribution penalty on your 2021 tax return and the corrective distribution would be of just the amount of the excess and would be nontaxable, reportable on your 2022 tax return.
Permalink Submitted by Alan - IRA critic on Fri, 2022-05-20 18:51
You should have received a letter of explanation from the plan, since an E coded 1099R can be generated for multiple situations. Perhaps the letter is in the mail or otherwise in process. Is box 2a also 8800?
You have plenty of time to file an amended return. If the 1099R is correct as issued, then you do have an excess IRA contribution to have removed with allocated earnings. Since you filed your return on time, you have until 10/17 to receive a return of the IRA excess contribution. That excess may well have a loss by now, so you may get back less than 8800. If there is a gain on the IRA excess, it would be taxable in 2021.
408(d)(5) does not apply here as long as you have the excess returned from the IRA by 10/17, which is the extended due date for the 2021 return.
A key question is whether this 8800 was from a matching contribution that is being recaptured by the plan. If so, the plan may attempt collection of that 8800 from you, and if you are being taxed on it in 2021 and have to return it to the plan in 2022, then you would likely pursue a claim of right deduction on your 2022 return. Google Sec 1341.
So in short I would either wait a couple weeks for a letter of explanation for the 1099R revisions or a letter requesting return of the 8800 if this was an excess matching contribution – OR call the plan and ask for a complete explanation.
Permalink Submitted by Rodger Wenzel on Sat, 2022-05-21 04:49
Thank you both for your replies. I am not expected a letter – but they may prove me wrong. They made excess contributions i think all 3 years I worked there – and removed them in prior years without notice (after audit)- but since it was all just within the 401K – no harm no foul. I was not alone in these excess matches – it would happen to 8-10 of executives – as found in thier 990’s!! Apparently there is no accountibility in being qualified to run a 401K plan!I will wait to see if they pursue – but I would assume they would not for various reasons. As to the queston about 2a – it is also $8800I cannot make contributions to the IRA as I have no taxable income in 2022 – and earned too much in 21. I will wait a few week – then contact Schwab / redo my taxes. Thank you both again. Take care,Rodger
Permalink Submitted by David Mertz on Sat, 2022-05-21 11:38
Earning too much in 2021 makes you ineligible to *deduct* an IRA contribution. You are still eligible to have made a $7,000 traditional IRA contribution for 2021, so you only have an $1,800 excess in the traditional IRA if on 2021 Form 8606 you report a $7,000 nondeductible contribution.