HCE Excess 401k plan distribution Box 7: code 8 vs P
Received a 1099 R with code 8 in box 7 and a letter from Schwab stating that due to failing annual 401k ACP testing, my employer needed to return a portion of my 401k traditional contribution along with earnings since I am considered a highly compensated employee. They said the issue happened in the 2021 plan year but that I must report on my 2022 taxes (I received the refund check in March 2022).
Because of other issues in 2022, this will cause a higher tax burden on those earnings (based on calendar year 2021) then if I was allowed to amend my 2021 return for the plan year where this occurred.
Do I have an option to have the code changed to P from 8 or am I stuck paying the higher taxes in 2022? If not, do I have some other option with the IRS to adjust for the higher taxes being paid?
Thanks.
Permalink Submitted by Alan - IRA critic on Sat, 2023-03-18 19:59
Sorry, but the excess contribution rules (unlike the excess elective deferral rules) require that the amount returned to you is taxable in the year distributed (2022), not the year that the excess contribution was made. Schwab will not be willing to change the code to P, but at least you will not have to amend your 2021 return.
Permalink Submitted by Cossy Pachares on Sat, 2023-03-18 21:12
Thanks for the fast reply!