How is loss reported for corrective distribution within 2 1/2 months o

[John A]

When an excess contribution is distributed within the first 2 1/2 months after the end of the plan year, and there is a loss associated with the distribution:

1) Should the check be cut for the amount adjusted for the loss (answer appears to be yes to me since 401(k) regs seems to say that losses should be taken into account,

2) how is distribution and loss reported, and for which year? (if it were a gain instead of a loss, then the deferral would be reported for the prior year, and the gain would be reported in the year of distribution; for a loss, is the gross amount reported on the 1099-R as being taxable in the prior year, but the loss reported on the 1040 for the year of the distribution?)

The question is for a calendar year plan year.

Does anyone just report the gross amount on the 1099-R and not worry about reporting the loss?

[Guest mo again]

I haven't done this in a little while but my recollection is that for a excess contribution or excess aggregate contribution, the reported amount is after adjustment for gains or losses. This is not true for excess deferrals; there, any loss has to be taken on the individual's tax return rather than being netted from the reportable amount. I believe the 1099-R instructions, and Notices 89-32, 88-33, and 87-77 address the mechanics.

[Guest SeanT]

I agree with the previous post...

Excess deferrals are ALWAYS taxable in the year the deferral took place (sometimes they are also taxable in the year of distribution too). The earnings/losses on these violations are always taxable in the year of distribution (which may be the same year as the deferral).

for example:

In 2000, an EE defers $11,500 to her 401(k) plan. On January 25, 2001, the excess is distributed. However, the investment experience on this $1,000 excess was a loss of $100. The $100 loss may be reported on the EE's 2001 Form 1040 as a negative number under "Other Income." The TPA (or whoever is processing the excess) should inform the EE that a investment loss has occurred.

The same theory DOES NOT apply to excess contributions and excess aggregate contributions. These excesses will reflect the investment experience on the check when distributed. And provided the excess is removed prior to the 2 1/2 month deadline following the close of the plan year in which the excess occurred, the excess contribution (or excess aggregate contribution) and the attributable gain/loss is taxable in the year of the excess.

(John, in your note you indicated that earnings on excess contributions are taxable in year of distribution - not true. Only if the excess contribution is removed after the 2 1/2 month deadline does it become taxable in the year of distribution.)

Remember to also consider the amount of the excess / excess aggregate contributions for the de minimis rule when determining taxable years -

Treas Reg 1.401(k)-1(f)(4)(v)(B)

[John A]

Sean, thank you for the correction - you are right, my note is wrong.

Also, the de minimis ($100) is determined before any allocable gain or loss.

[Guest Jose Rosario]

Can anyone clear up how losses associated with excess after-tax employee contributions will be reported on the 1099?

For example, if the excess employee contributions are $500, the loss is (-$100) and the gross distribution is $400, can (-$100) be enterd into the Taxable Amount bax on the 1099?

[Alf]

Also, can someone clarify the reporting of the loss on an excess deferral? From the above posts, it sounds like the 1099 for the year of deferral shows the gross amount deferred, but the employee only received the net amount because the distribution of the excess deferral has to be adjusted for losses, right? Then, the employees tax return for the year of distribution has to report the loss. But how is the loss reported to the employee? Can a 1099 report a negative amount, and is it that simple?