Excess Contributions for Prior Years and 1099-R Codes

[lcollins300]

We have a situation where an owner deferred fully to his own plan in 2017 and 2018 but had also deferred fully in another employer's 401(k) plan where he was just a participant.  CPA is having to amend his 2017 and 2018 returns.  We have read that the distributions must be taxable in both the year of deferral and the year oaf distribution.  Excess contributions plus earnings were calculated for both the 2017 and 2018 deferrals and distributed in Dec 2019.  Question:  Unsure what to code the 2019 1099-R?  Not P but maybe a 8 which is confusing as this signifies that the excess contribution stems from 2019 deferrals......…. Any help would be great!

[Mike Preston]

Is there a code for "Gee, the owner was asleep at the wheel when he/she deferred in excess of the 402(g) limit.  Rather than follow the code and regs which requires taxation when distributed, said owner has now compounded the problem by taking an inservice distribution."

Why, yes there is!  It is whatever code you would use for an inservice distribution (either pre or post 59 and 1/2). 1099 issue solved.

Now to the more fun part.  Did the plan allow the in-service distribution?  If so, did the owner fill out the correct forms to generate the inservice distribution? If no to either, you now have a qualification issue that needs to be fixed.

Are we having fun, yet?

[Bird]

15 hours ago, lcollins300 said:

We have read that the distributions must be taxable in both the year of deferral and the year oaf distribution.

I had a mental block about this for some time and will spell it out for anyone who is similarly confused.  The idea is that if you pass the deadline for returning excess deferrals, you leave them in, and whenever they are taken out (termination of employment, retirement, etc., maybe many years later) they are taxed just like any other plan asset.  But "taxable in the year of deferral" means that the participant doesn't get a deduction.  So in this case the returns are amended to show higher income, and that's about it.  

Mike is pointing out that when they come out, they are/should be just a regular distribution, with regular coding (1 or 7 or whatever).  It's too late for a corrective distribution.  If the "regular" distribution wasn't allowed, then that creates a different problem.

FWIW and hoping that the freeing of the mental block was in fact accurate...

[Mike Preston]

11 minutes ago, Bird said:

  So in this case the returns are amended to show higher income, and that's about it.  

 

Regarding the above, that really should not be necessary.  Any decent tax preparer will complete a tax return limiting the 402g deferral to that year's limitation. 

[Bird]

4 hours ago, Mike Preston said:

Regarding the above, that really should not be necessary.  Any decent tax preparer will complete a tax return limiting the 402g deferral to that year's limitation. 

Agreed and I wondered about how it happened.  Possibly mangled up with PS but then you wonder how it was caught.  Incompetence is a curious thing.

[lcollins300]

So the 2019 1099-R should not be coded an "8" but as either a 7 for normal or 1 for early distribution (allowed by the plan).  And no 2017 and 2018 1099-R have to be completed?  I was reading the below and thought we had to do a 2019 1099-R for year distributed but also one for 2017 and one for 2018 along with amended returns.

7. Under Revenue Procedure 2019-19, 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. These amounts are reported on Forms 1099-R.

[Mike Preston]

Somebody needs to write you a very long message.  You aren't getting it.