Excess Deferral and Excess Contributions in 2010

[Below Ground]

This posting hopes to get a quick refresher for myself and others on the "primary issues" of returning Excess Deferrals and Excess Contributions. I am posting below my understanding on rules that would apply to 2009 Contributions that would be returned in 2010. Thanks for any and all comments.

Excess Contributions (and Excess Aggregate Contributions) are monies that need to be returned given failure of ADP / ACP Testing; assuming that recharacterization, catch-up, and QNEC/QMAC is not applicable. In all cases, the participant is taxed on net value of contribution value plus/minus allocable investment return in the year of receipt. A Form 1099R is used to report this income (2010). If paid after 2 1/2 months from the plan year end, a 10% excise penalty tax applies. This tax is based on the contribution value, and is paid via Form 5330 within 15 months of plan year end.

Excess Deferrals are computed on the calendar year, and result from exceeding the IRC 402(g) Limit of that calendar year. If paid before the April 15th that follows the close of that calendar year, the deferral amount is taxed in the year of deferral and the allocable income is paid in the year of receipt. A 1099R is only used for the allocable income, since the Excess Deferral would be picked up as taxable on the person's 1040. If paid after April 15th, the contribution value is taxed in both the year of deferral and the year of receipt. This is done by including the contribution value on the 1099 that was used for the allocable income.

GAP Income applies to neither.

Again, thanks for your comments.

[BG5150]

In all cases, the participant is taxed on net value of contribution value plus/minus allocable investment return in the year of receipt.

'Net value' includes the gain/loss; no need to add it in twice.

[Below Ground]

Sorry BG. That is what I meant. Guess I wasn't clear, so thanks for making that clear.

[BG5150]

I think I knew what you meant, but I'm just being persnickety today.

[Tom Poje]

1099R is used to report excess deferral code P showing taxable in prior year

and a 2nd 1099 to indicate earnings code 8 (taxable in current year - the actual year of distribution)

if I understand the rules correctly, if there was a loss then the world stops, hell freezes over, planets collide and all other sorts of strange things happen. you end up reporting the loss as 'other income on your tax form. no 1099R for the loss and everyone gets confused as to what happens. you send the person a note signed by mom saying you can report the loss. or something like that. I looked it up once and tried to erase it from my memory but it is still partially buried there.

if late excess deferral (after April 15) then only one 1099R indicating total amount of distribution and taxed in year of distribution.

there is no 1099 for the excess deferral, but the person still was suppose to claim it in that year - thus the person is taxed twice, and whatever other nonsense could take place (e.g. I think 10% early withdrawal may apply in the year of distribution because it is now no longer an 'excess distribution' but a distribution.

ugh, don't be late. please.

[BG5150]

I thought the excesses are taxable in the year of distribution now, regardless of when they are taken.

[Tom Poje]

thats excess contribution, not excess deferral

[K2retire]

if I understand the rules correctly, if there was a loss then the world stops, hell freezes over, planets collide and all other sorts of strange things happen. you end up reporting the loss as 'other income on your tax form. no 1099R for the loss and everyone gets confused as to what happens. you send the person a note signed by mom saying you can report the loss. or something like that. I looked it up once and tried to erase it from my memory but it is still partially buried there.

Tom, Ive never understood the above process until now. Thanks for clarifying it!

[Below Ground]

Thanks for your comments. Hope this helps others as much as me.

[CTipper]

This has helped tremendously.

But, one more question.

This only has to do with when the participant is taxed. Right?

It has nothing to do with the 10% excise tax. (And if this was already answered in this post, forgive me)

If the money comes out today it's taxed in 2010 instead of 2009 and there's no 10%

If the money comes out March 16th it's taxed in 2010 like before and there's the 10% like before

Is that right?

thanks

Christopher

[Below Ground]

Chris,

Keep in mind the differences between Excess Deferral (over 402g) and Excess Contribution (ADP/ACP). Your 2 conclusions were correct for Excess Contribution, but not for Excess Deferrals. See my OP for details.

[CTipper]

Chris,

Keep in mind the differences between Excess Deferral (over 402g) and Excess Contribution (ADP/ACP). Your 2 conclusions were correct for Excess Contribution, but not for Excess Deferrals. See my OP for details.

Yup. You're right. I was only looking at Excess Contributions.

Thanks

Christopher

[Below Ground]

For some reason, I am drawing a blank. Is the 10% penalty based on the contribution adjusted for allocable income, or the contribution only? In my OP I said on the contribution only value. Was I right?

[Guest lorengo]

In the case of the Excess deferrals IRC 402 (g) - if the error is identified after the contribution has been posted to the participants 401 (k) account can it be corrected via payroll ~ that is, instead of sending the distribution to the participant (and issuing a 1099) - the distribution or excess amount (including interest) would be allocated to the forfeiture account and then make payroll corrections and issue a new W-2?????

[Below Ground]

Lorengo - I am quite certain that a distribution must be made. I believe the correction that you are suggesting would represent a forfeiture of vested monies, which is not permissable. How else would you account for these monies? While I could be wrong, I am 99.99999% certain that the Excess Deferral must be paid out no later than the following plan year end.

[Guest lorengo]

Thanks!!!!

[Guest Sieve]

And, for what it's worth--since no one responded directly--I agree with BG in his earlier post (#6) that the amounts are compensation in the year distributed. The old rule which might have considered some amounts to be compensation in a prior year has been changed.

[Tom Poje]

again, its the excess contributions that are taxed in the year of distribution.

excess deferrals are taxed in the year made, and if not distributed by April 15, are taxed a 2nd time, in the year of distribution.

[BG5150]

And to answer a previoulsy asked question: the excise tax applies to the gross amount; the earnings are not included. Form 550 mentions only the excess and excess aggregate contribution, nothing about the distributions.

[imchipbrown]

I've discovered a mistake I made in 2015 where I allowed an excess deferral (402(g)) of $2,000.  I'll refund it before 4/15/17, along with earnings.  My question is about 1099-R reporting.  Do I issue a 2015 1099-R?

It's happened again (another $2,000) for 2016.  I assume I'll issue a 1099-R for 2016.  For $2,000 or $4,000.  I guess the 2016 earnings are reported on a 2017 1099-R.

 

[RatherBeGolfing]

31 minutes ago, imchipbrown said:

I've discovered a mistake I made in 2015 where I allowed an excess deferral (402(g)) of $2,000.  I'll refund it before 4/15/17, along with earnings.  My question is about 1099-R reporting.  Do I issue a 2015 1099-R?

It's happened again (another $2,000) for 2016.  I assume I'll issue a 1099-R for 2016.  For $2,000 or $4,000.  I guess the 2016 earnings are reported on a 2017 1099-R.

 

You always use the 1099-R for the year of distribution.

For 2015, the excess could have been distributed prior to April 15, 2016 with two 2016 1099-Rs.  one with the excess and code P (prior year) and one with the earnings which are taxed in the current year (2016).

After April 15, 2016, the full amount is included as income in the distribution year.  The participant therefore had to include the 2015 excess as comp in 2015 since the excess cannot be excluded from comp, and then again in the year of distribution (including earnings)

For 2016, you can correct by April 15. You issue a 2017 1099-R with code P and another 2017 1099-R for the earnings.

You will issue 3 2017 1099-R.

1. 2015 excess plus earnings.  Participant also owes 2015 taxes on the excess if they were not paid but that is a different issue. Taxable in the year of distribution.

2. 2016 excess with code P for prior year.  Taxable in the year of excess.

3. Earnings for 2016 excess.  Taxable in the year of distribution.

[imchipbrown]

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[imchipbrown]

5 hours ago, RatherBeGolfing said:

1. 2015 excess plus earnings.  Participant also owes 2015 taxes on the excess if they were not paid but that is a different issue. Taxable in the year of distribution.

 

Curious what the Code might be for the 2017 1099-R.  If it matters, there were no earnings for the 2015 excess.

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..that is a different issue

I assume this means filing an amendment to 2015 Form 1040?

As much as golf hates me, I might rather be there....

[RatherBeGolfing]

12 minutes ago, imchipbrown said:

Curious what the Code might be for the 2017 1099-R.  If it matters, there were no earnings for the 2015 excess.

I assume this means filing an amendment to 2015 Form 1040?

As much as golf hates me, I might rather be there....

Code 8 - Excess deferrals taxable in 2017.  

The 1040 will depend on how the participant filed and paid taxes in 2015.  If the participant did not include the excess as income in 2015, an amended 1040 would be probably be needed.  The 2015 W-2 should signal to the IRS to expect a 1099 for the excess since the W-2 shows deferrals in excess of 402(g) limit.

[imchipbrown]

Per IRS Plan Fix-It guide:

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Timely withdrawal of excess contributions by April 15

• Excess deferrals withdrawn by April 15 of the year following the year of deferral are taxable in the calendar year deferred.
• Earnings are taxable in the year they're distributed.
• There is no 10% early distribution tax, no 20% withholding and no spousal consent requirement on amounts timely distributed.

 

It's the 2016 excess I'm unclear on.  If it's taxable in the year of deferral, wouldn't I issue a 2016 1099-R for the deferral and a 2017 1099-R for the earnings?  (And another 2017 1099-R for the 2015 excess deferral.  "Luckily" no earnings involved.)

 

 

[RatherBeGolfing]

2 hours ago, imchipbrown said:

Per IRS Plan Fix-It guide:

Quote

Timely withdrawal of excess contributions by April 15

• Excess deferrals withdrawn by April 15 of the year following the year of deferral are taxable in the calendar year deferred.
• Earnings are taxable in the year they're distributed.
• There is no 10% early distribution tax, no 20% withholding and no spousal consent requirement on amounts timely distributed.

 

 

It's the 2016 excess I'm unclear on.  If it's taxable in the year of deferral, wouldn't I issue a 2016 1099-R for the deferral and a 2017 1099-R for the earnings?  (And another 2017 1099-R for the 2015 excess deferral.  "Luckily" no earnings involved.)

Lets assume that the participant deferred $20,000 in 2016 (18,000 plus $2,000 excess).  The W-2 would show $20,000 in Box 12 since the excess must be reported on the W-2.  The excess is not included as wages in Box 1 because it was deferred.  The participant has to include the excess as income for 2016 because you can't exclude income in excess of the 402(g) limit.  Your basic tax prep software should pick this up assuming the W-2 was prepared correctly.

It is now 2017 and you want to make the correction prior to April 15 which means that the excess is taxable in the year of deferral (2016)  and the earnings are taxable in the year of distribution (2017).  

You don't need a 1099-R to report  the taxable income to the participant, the W-2 already did that when we reported excess in Box 12.  

You do need a 1099-R to report the distribution of the excess in 2017, even though it was already taxed in 2016.  So you issue the 2017 1099-R with a code P (prior year) to show that while distributed in 2017 it was taxed in 2016.

You also issue a second 2017 1099-R for the earnings on the 2016 excess with a code 8 (taxable in 2017).

Compare that to the 2015 excess.  The same W-2 rules apply, $20,000 in Box 12 which means participant had to include the excess as 2015 income.  We have now taxed the excess once.  

You did not correct by April 15 so the excess is taxable AGAIN in the year of distribution.  This is reported with a code 8 on the 2017 1099-R (plus earnings had there been any).  

The participant had to include the 2015 $2,000 as income in both 2015 (on the W-2) and 2017 (on the 1099-R).  The 2016 excess was only included as income in 2016 (W-2).

Does that help clear up why you use the 2017 1099 even though it was taxable in 2016?