Late 402(g) refund--1099-R question

[BG5150]

Participant had 2021 402(g) excess of 1,000.  At time of distribution there was $20 in earnings.

The IRS says it's taxable in both years.  (I knew that).  But it also says BOTH amounts are reportable on a 1099-R.  I thought just the 2022 amount is reported on a 1099-R (basis and the earnings), but the 2021 overage would be taken care of on the 1040 using the W2.

Here's what the IRS site says:

Under Revenue Procedure 2021-30, Appendix A, section .04, the permitted correction method is to distribute the excess deferral to the employee and to report the amount as taxable both in the year of deferral and in the year distributed. These amounts are reported on Forms 1099-R. In the case of amounts designated as Roth contributions, the excess deferral will already have been reported in income in the year of deferral. However, the amount will be reported as taxable in the year distributed.

[Bri]

Does the guy's W-2 show all 20,500 that was deducted?  There's a 1,000 over-deduction which is then offset by the issuing of the 1099-R.

(As opposed to "fixing" the W-2 to show just 19,500 in the first place...)

 

[BG5150]

Yes.  The W2 shows $20,500.

Usually we would issue a 1099 for the excess and earnings with code 8. and let the prior year take care of itself.

The IRS site looks like it says we should be issuing 2 1099's.

[Bri]

So it sounds like one 1099 for the earnings (current year) and one for the excess (prior year or wait are you saying it was paid after 4/15 so it's also a current year amount?)

[pmacduff]

My two cents - I found this on the IRS website. 

Example:

Employer X maintains a 401(k) plan that has 21 participants and plan assets of $715,000. For calendar year 2020, Ann deferred $20,000 to the plan. None of the elective deferrals were designated as Roth contributions. Ann is under age 50 and isn't eligible to make catch-up contributions. Ann has excess deferrals of $500 because $19,500 is the 402(g) maximum amount permitted for 2020. Employer X didn't discover this mistake until after April 15, 2021. On November 1, 2021, X distributed the excess deferral (plus earnings of $10, totaling $510) to Ann.

For 2020 (year of deferral), Ann must include $500 in gross income. For 2021 (year of distribution), Ann must include $510 in gross income. Employer X would report this amount on Form 1099-R. In addition, Ann must pay the additional 10% early distribution tax under IRC Section 72(t).

 

Therefore in your example I think the $1000 from 2021 is reported on a 2022 1099-R with a code "P" (taxable in previous year).  The $1020 is also reported on a 2022 1099-R with a Code "8" (taxable in current year).  Two 1099-R forms and then it's up to the participant to revise their 2021 taxes as applicable -

 

[BG5150]

Ah.  makes sense.

 

[RatherBeGolfing]

19 hours ago, pmacduff said:

Two 1099-R forms and then it's up to the participant to revise their 2021 taxes as applicable -

If it is a 402g excess there should be no need to revise the 2021 taxes.  No matter how much you contribute, you can only defer taxation up to the 402g limit.  Box 12 will show the amount contributed but Box 1 will only reduce income by deferrals up to the 402g limit.  The excess is already included as taxable income on the 2021 return.  The IRS will square the excess deferral on the W-2 with the 1099-R with a code P.

 

 

[Luke Bailey]

One implication of the above, BG5150, is that while the deferrals are taxed twice, the employee who exceeded the limit (assuming the excess is attributable to the employee's having contributed to multiple plans and no corrective distribution is required under EPCRS) does get deferral on the earnings on the excess deferral. In the example on the IRS website the distribution is in the year immediately following the excess deferral, so it is minimal and easy to overlook, but it could be 10 or 20 years. And the excess does qualify for rollover (again, assuming the multiple plan scenario).

I'm assuming these are pre-tax. Roth excess deferrals are more complicated.