1099-R related to excess 401k contributions

Submitted by Viswa Bhattachar on Mon, 2023-02-27 11:19

My employer deposited more than the allowed amount into my 401k in 2021. The retirement plan custodian refunded the excess amount and associated earnings in March 2022.

My employer updated my W2 to include the excess contribution as income, and also reduced the amount shown as 401k contribution by the same amount. I included the corrected W2 in my 2021 return. I will be including the earnings on excess contribution in my 2022 return.

The retirement plan custodian has issued two 2022 1099-Rs. One for the excess contribution (Code P) and the other for the earnings (Code for earnings on excess contribution).

I have file a correction to my 2021 return with the 1099-R related to excess contribution. This will result in double payment of taxes on the excess contribution. Should my employer issue a correction to the corrected 2021 W2 reducing the income by the amount of excess contribution? Or is paying taxes twice the norm?



Submitted by David Mertz on Mon, 2023-02-27 12:29

Per the example in the instructions for code D in box 12 of Form W-2, your employer should not have changed the 2021 W-2 to include the excess deferral amount in box 1 and should not have reduced the amount shown in box 12.  You’ll need to obtain a corrected 2021 W-2 from the employer changing it back to what was originally reported.

Submitted by Viswa Bhattachar on Mon, 2023-02-27 20:08

The corrected 2021 W2 removed excess deferral amount from Box 12, and added excess deferral to income in box 1. So my 2021 taxes include the excess deferral that was returned to me in March 2022.Should the employer issue a 2nd correction to 2021 W2 reducing Box 1 by the amount of excess deferral (since I have the 1099R with Code P for this amount)? 

Submitted by Alan - IRA critic on Mon, 2023-02-27 20:37

Yes, they should correct the corrected W-2 to return to the original W-2 figures, which were correct. Check your 2021 return to determine if you need to amend it or not. Some tax programs will automatically add any excess deferrals to your wage income. But the amended W-2 plus the 1099R will result in double taxation. The 1099R is correct, but the amended W-2 is the problem. The first amended W-2 shows that the plan administrator does not know how to report excess deferrals.

Submitted by Viswa Bhattachar on Mon, 2023-02-27 20:49

Since I have already filed my 2021 return with the corrected W2 (that includes the excess contribution, but with the in-limits deferral in Box 12 Code D), would it be safe to ignore the 2022 1099-R (with Code P)?If not, I believe I have to get a re-corrected 2021 W2 (without excess contribution in Box 1, but with the in-limits deferral in Box 12 Code D) and file the re-corrected W2 along with the 2022 1099-R (with Code P). Net effect is zero extra taxes if done in this manner, right?

Submitted by Alan - IRA critic on Mon, 2023-02-27 21:22

At this point, given that the plan is confused with regard to correct reporting, and if your 2021 return shows the correct wage income on line 7, I would ignore the 1099R. However, the IRS will probably contact you at some point, so I would prepare your response now to have it ready. You would need the original W-2, the corrected w-2, and the 1099R, and you would have to send copies to the IRS with an explanatory statement  that the corrected W-2 should never have been issued to correct excess deferrals, but since it was and you have already reported the correct wage income for 2021, the 1099R is reporting duplicate income.

Submitted by Viswa Bhattachar on Tue, 2023-02-28 11:13

My employer tells me that the federal tax law “requires” that I be taxed on the excess pre-tax contributions “twice” – both in 2022 and 2023 (the years may have been quoted in error). The “tax twice” does not sound right to me, but I wanted to confirm whether there is such a provision in the tax code.

Submitted by David Mertz on Tue, 2023-02-28 12:58

  • Double taxation would have been correct if the excess deferral for 2021 was not distributed by April 15, 2022.  However, you said that the corrective distribution was obtained in March 2022 before that deadline, avoiding double taxation.  If you want to continue to pursue this with the employer, I suggest referring the employer to the example for code D in instructions for Form W-2.  The relevant paragraph says:
  • “Even though the 2021 limit for elective deferrals and designated Roth contributions is $19,500, the employee’s total elective deferral amount of $21,500 is reported in box 12 with code D (D 21500.00). The designated Roth contribution is reported in box 12 with code AA (AA 1000.00). The employer must separately report the actual amounts of $21,500 and $1,000 in box 12 with the appropriate codes. The amount deferred in excess of the limit is not reported in box 1. The return of excess elective deferrals and excess designated Roth contributions, including earnings on both, is reported on Form 1099-R.”
  • Note the “elective deferrals” refers to the $21,500 that went to the traditional account in the 401(k), $2,000 more than the $19,500 limit for 2021.  You made no contributions to the designated Roth account, so the references to the $1,000 designated Roth contribution in this example can be ignored.

Submitted by Viswa Bhattachar on Wed, 2023-03-01 00:52

The IRS website has a very helpful tool to determine what to do with excess 401k deferrals. I was able to get information on what I need to do. Essentially I have already done what it asks me to in my original 2021 return, ie. include the excess deferral amount in my 2021 income. I have a letter to IRS ready if they ask about the 1099-R as Alan has suggested.

Submitted by Viswa Bhattachar on Sat, 2023-03-04 12:33

A quick follow up question: If I file a corrected 2021 return to include a 2022 1099-R (with Code P), my employer is willing to refund the additional double tax (federal and state). BTW, the 1099-R amount was already reported in my original 2021 return via a corrected 2021 W2 provided by my employer (incorrectly). However, I have to go through the trouble of correcting the returns and filing them.Question: Is the corrected 2021 return worth the trouble in this situation?

Submitted by Alan - IRA critic on Sat, 2023-03-04 16:52

  • There is nothing to correct. You already added the excess deferrals for 2021 to your wages because  the employer incorrectly revised the W-2. Now they want you to amend your return again now paying double on this income plus late interest penalty, and they will reimburse you?  Makes no sense because your return is correct now. You paid taxes once on the excess and they returned the excess to you last year.
  • I suggest sticking with your original plan and your current 2021 return, and ignore the 1099R. 

Submitted by Viswa Bhattachar on Sat, 2023-03-04 19:02

Strangely enough my employer is willing to re-imburse the amount of double tax. It appears they realized their mistake and are willing to over correct (but this means extra unnecessary work for me).I think I will stick with my original plan and ignore the 1099-R. Thanks for your advice.

Submitted by Viswa Bhattachar on Sat, 2023-03-04 19:06

The double taxation law would have applied in my case if the excess 2021 contribution was returned after April 15, 2022 (per IRS rules). The amount was returned to me in March 2022 which means my original 2021 return is still correct.

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