1099-R codes for excess deferrals and attributable income that is being distributed 4 years after the excess deferrals

A participant who is above 59 1/2 years of age is seeking a distribution of excess deferrals (they paid $20,500 above the 402(g) limit) and attributable income ($2,452) to a ROTH 401k. The client made the contributions in 2022 to two separate employer plans, so neither plans were able to detect the over-contribution. Both are contributions were ROTH. The client is still employed by both employers and both allow in-service withdrawals. The participant caught the error and reported to both administrators and employers. 

How would you code the 1099-R?

1. Would you process this as a "normal" distribution (Code 7). The IRS instructions for forms 1099-R from 2025 states that "Use Code 7: (a) for a normal distribution from a plan, including a traditional IRA, section 401(k), or section 403(b) plan, if the employee/taxpayer is at least age 59 1/2..."

or 

2. would you use code 8—Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2025. (this information is Instructions for Forms 1099-R and 5498 (2025). It states "Use Code 8 for a corrective IRA distribution under section 408(d)(4), unless Code P applies. Also, use this code for corrective distributions of excess deferrals, excess contributions, and excess aggregate contributions, unless Code P applies. See Corrective Distributions, earlier, and IRA Revocation or Account Closure, earlier, for more information."

or is there some other coding of the 1099-R?

Thanks!

Hi Sami,

Austin's response pasted from ERISApedia may prove helpful for your reference: 

My (unresearched) gut thought would be that the distributing Plan would determine the share attributable to earnings/basis of any In-Service distribution of Roth funds in the same manner it normally would (I imagine possibly by multiplying the ratio of earnings/basis against the amount of the Roth account being distributed), not by calculating in the manner that you normally would for a 402(g) refund (considering the earnings only since the contribution date).

However, this would seem to provide an advantage to the Participant by allowing the gains on this 402(g) excess to have accumulated tax-advantaged. I wouldn't think the IRS would intend an individual gaining an advantage by circumventing the regs., but that is how I read the ERISApedia citation (specifically "Second, for tax purposes, undistributed excess deferrals are treated as if they were proper elective deferrals when contributed").

I believe it would be Code 7.  Under the applicable regulations, excess designated Roth contributions are taxed twice if not timely corrected. Treas. Reg. § 1.402(g)-1(e)(8)(iv) provides, if not corrected by April 15 of the following year, the distribution from a Roth account of the excess Roth contribution and the attributable earnings are taxable no matter when they are later distributed, subject to the normal limitations on distribution of elective deferrals, despite the fact that the distribution is from a Roth account.

Treas. Reg. § 1.402(g)-1(e)(8)(iv) regarding distributions after the correction period states:

Quote

(iv)       Distributions of excess deferrals from a designated Roth account.   The rules of paragraph (e)(8)(iii) of this section generally apply to distributions of excess deferrals that are designated Roth contributions and the attributable income. Thus, if a designated Roth account described in section 402A includes any excess deferrals, any distribution of amounts attributable to those excess deferrals are includible in gross income (without adjustment for any return of investment in the contract under section 72(e)(8)). In addition, such distributions cannot be qualified distributions described in section 402A(d)(2) and are not eligible rollover distributions within the meaning of section 402(c)(4). For this purpose, if a designated Roth account includes any excess deferrals, any distributions from the account are treated as attributable to those excess deferrals until the total amount distributed from the designated Roth account equals the total of such deferrals and attributable income.

So it seems that while a normal distribution from a Roth 401(k) is not taxed at distribution at all, an over contribution is taxed in the year received.