2002 Excessive employer withdrawal/contribution to my 401K

[Guest blb]

Hi,

I am not sure how to handle an overpayment to my 2002 401K. In addition to more than fully funding the main 401K, I also contributed the additional $1000 allowed for those >50.

In 2002, my employer had a change in dba. As a result, I had an extra $1000+ (automatically) withdrawn from my salary and deposited to my main 401K. This was not realized until Jan 2003.

This past week, the 401K Fund withdrew ~$885 (gross) and issued a check for the gross less 10% Federal tax. I have not yet received the check.

How do I reflect this when I file my taxes? Will both the Federal and State (NYS) taxes be impacted?

Many Thanks.........BLB

[R. Butler]

Why are you getting this back. Is it because of a failed nondiscrimiantion test or because you exceeded the 402(g) dollar limits?

[Guest blb]

Thanks for your reply R. Butler. I really don't know why my employer is handling it in this way.

My 401K is via automatic payroll deductions and someone in payroll 'goofed'.

Over 100 employees in the company had excessive $$ put into their 2002 401K plans.

RE: the payout (~$885) originally mentioned - I am told I am supposed to claim the $$ as ordinary income for 2003 and that I am going to receive a 1099R for 2003 with the check.

I have been told that I won't be getting any revised tax info for 2002 and don't know how to handle the the issue for my 2002 taxes.

HR sends me to payroll who sends me to the fund family!!!!!!

Thanks again.........blb

[Mike Preston]

You need to find out whether the amount being refunded is due to amounts that you deferred which are in excess of the maximum allowed by law (12000) or in excess of the maximum allowed in the plan (this limit can vary). It sounds like it is the latter, because they have told you that you will be taxed on the amount you are getting back in 2003. However, if they have led you astray, and you are getting money back because you have deferred in excess of the maximum allowed by law, you will find that the impact is that you end up paying tax on the entire amount of the overcontribution in 2002. That is, you will only be able to exclude from income the 12000 maximum allowed by law, even if you deferred more. If this is the case, the 1099 you will get for the distribution (a 2003 1099) doesn't really mean much to you.

[Guest blb]

Thanks Mike. The amount being refunded is due to amounts which are in excess of the maximum allowed by law (12000).

Using rounded #s, in 2002 an extra $1000 was contributed via payroll deduction to my 401K. This was realized just after 1/1/03.

The excess was paid out last week in the following manner:

2002 excess: $1000.00

Loss realized: $250.00 (per the 401K fund calculation)

2003 Refund amt (gross): $750.00

2003 Refund amt (net; 10% Fed Tax of gross): $675.00

We were told we would be issues a 1099-R for 2003 in Jan 2004. What amounts do I claim for 2002 &/or 2003?

1. For 2002, should I claim the $1000.00 as additional ordinary income and the $250.00 as a loss? I am assuming that I will be fully taxed in 2002 on the $750.00.

2. When and how do I show the 10% Fed Tax of gross that I've already paid with the 2003 refund?

Thanks........B

[Mike Preston]

I don't think you are going to like this reply. As stated in my prior message, the maximum that you can exclude from income in 2002 is 12000. The fact that you put 13000 into the plan doesn't matter. You are automatically being taxed on that extra 1000 dollars. Yes, the full 1000 dollars.

Now,you received a check in 2003. That check came about from the following:

1) Cash (that's good), which you were already taxed on in 2002 (that's bad)

2) Some withholding (seems weird to withhold money from something that is not taxable to you in the year of the withholding, but I think there is some support for this).

3) The investment loss. Not too much recourse here. Probably can be treated as an investment loss, but it probably doesn't get you a dollar for dollar deduction. You'd have to get a more definitive answer on this point from an accountant. Maybe Mary Kay will see this.

As far as the withholding goes, when you get the 1099 for 2003 it will show that you had some money sent to the IRS in 2003 and you get credit for that on your 2003 return. Seems like you have made an interest free loan to the government. It doesn't seem like a big enough amount to make trouble over, however.

[Guest blb]

Thanks again Mike.

Sorry, but I'm still not clear as to what year (2002 or 2003) would be used for the following entries on my tax returns:

1. Entering the $1000.00 as ordinary income?

-> 2002 tax return or 2003 tax return ??

2. Entering the $250.00 as a loss?

-> 2002 tax return or 2003 tax return ??

3. Crediting the $75.00 (the 10% tax on the $750.00 received in 2003 check?

-> 2002 tax return or 2003 tax return ??

[Mike Preston]

1. You don't "enter" it anywhere. It just happens. Your income from your employer was $X. It doesn't matter whether you put $0 into the 401k or $13,000, it is still $X. You report that on your 2002 tax return. Later, you exclude from income your 401k deferrals. The amount that you can put on that line is maxed out at $12,000. Even though you actually put $13,000 into the plan, you still only list $12,000. When you compute the amount of income subject to tax, you will subtract $12,000 from $X (along with other stuff). The net effect is that you pay tax on the additional $1,000.

2.If you enter it as a loss at all, it will be for 2003.

3. 2003 tax return, because that is when the money was forwarded to the IRS. I'm not 100% sure on this one, though. Again, since there was nothing really taxable to you in 2003, as fas as the check you received goes, then I'm not sure it was appropriate to withhold taxes. But, they _were_ withheld, so you are entitled to get credit for them. Since they were withheld in 2003, I don't think you can claim them as having been withheld for your 2002 taxes.

[2muchstress]

The amount of the excess deferral (unadjusted for the earnings) must be included as taxable income in the year in which it was contributed (2002). This amount ($1,000.00) should be included in line 7 of Form 1040 for 2002. The attributable earnings (-$250.00) should be reported as “Other Income” in the year in which the funds were distributed (2003). Including a negative number as other income essentially gives you a deduction for the loss. I believe other income is reported on line 23 of the 1040, but it has been a while since I have looked at the 1040 forms.