Excess Deferral Tax Treatment

Let's say there is a catch-up eligible participant who defers $25,000 instead of the allowed $24,000 for 2017.

Let's say he then takes a distribution for excess deferral during 2017. Let's say the distribution is for $1,050 ($50 being the earnings). How would that be reported on 1099-R?

Would $1,050 be the taxable amount on 1099-R? In this case, wouldn't the participant end up paying taxes on the amount of excess twice? Once when it's distributed (on the 1099-R) and also when he files the taxes and the tax software doesn't let him deduct more than $24,000 limit. Or would a software allow a deduction of more than $24,000 in this case (since there is a corresponding distribution for the excess)?

Thanks,

$25,000 is reported as deferrals in Box 12 the W-2 

The excess deferrals are NOT included as wages in Box 1 of the W-2 

2017 Form 1099-R is issued for $1,050 with reporting code 8 (excess deferrals and earnings taxable in 2017)

The participant is only taxed on the excess once because it is not included as wages on the W-2 but is included as income on the 1099-R.  Tax software should pick this up.

Ok, so the software would allow a deferral of over $24,000?

What if the distribution is only made next year and code P is used? Shouldn't the deferral be decreased to $24,000 in 2017 in this case, because it's taxable in the previous year (2017) and the 1099-R is only issued in 2018 with code P indicating that the distribution was already taxed?

Thanks.

20 hours ago, Vlad401k said:

Ok, so the software would allow a deferral of over $24,000?

Yes, because even excess must be counted for Box 12, and if it is in Box 12 it is NOT in Box 1.   It is a deferral contribution even if it is excess, you just don't get the tax benefit of deferring compensation on the excess.  Since it is a deferral contribution, it goes in Box 12 and is not in Box 1 as wages.  This signals to the IRS that you exceeded the limit and must pick up the excess as additional income (even if you don't have a 2017 1099 for the distributed excess).  So while it isn't in Box 1, the software should know (because the IRS sure knows!) that the excess is other income.

20 hours ago, Vlad401k said:

What if the distribution is only made next year and code P is used? Shouldn't the deferral be decreased to $24,000 in 2017 in this case, because it's taxable in the previous year (2017) and the 1099-R is only issued in 2018 with code P indicating that the distribution was already taxed?

You still pick up the excess as other income.  The W-2 should look the same because you are required to list the excess as a deferral.   As long as distributed by April 15, 2018 you would issue two 1099-R.  One for the excess with code P (since it was taxed in the prior year), and one for the earnings with code 8 because earnings on excess are taxed in the year of distribution.

To the IRS, the excess amount on the 2017 W-2 and the 2018 1099-R will resolve the issue.

So, let's say a participant made $100,000 income in 2017. Let's say he deferred $25,000 and he's over 50. So, $1,000 should be distributed back as excess.

1) How would that be reported on the 2017 tax return if he distributes the funds in 2017? Would $75,000 taxable income and $25,000 deferred be originally reported? How would the $1,000 excess distribution affect both of these numbers? The taxable income would go up to $76,000, but how would the deferral amount go down to $24,000. Would it be a manual entry?

2) How would that be reported on the 2017 tax return if he distributes the funds in 2018? Would $75,000 taxable income and $25,000 deferred be originally reported? What if the $1,000 excess distribution is made by April 15. How would that affect the tax return for 2017?

perhaps a better way of thinking about it.

the govt looks at the W-2 and assuming their computers are intelligently programmed will see that he had too much in deferral. therefore, whether or no he gets a distribution by April 15 or not, the excess is still treated as income and will be taxed in 2017. if he didn't get a distribution and may not even know about it, the IRS will 'gently and lovingly' tell him, if I (as a Grinch, of course) understand how it works. 

now, if the amount is not distributed by April 15, then it will show up as a distribution in 2018 (or whatever year) and he will be taxed again. and, as I recall, if he is not 59 1/2 there may be the early distribution penalty.

1 hour ago, Vlad401k said:

1) How would that be reported on the 2017 tax return if he distributes the funds in 2017? Would $75,000 taxable income and $25,000 deferred be originally reported? How would the $1,000 excess distribution affect both of these numbers? The taxable income would go up to $76,000, but how would the deferral amount go down to $24,000. Would it be a manual entry?

There is a difference between taxable income and wages reported in Box 1.  The taxable income is $76,000, but the W-2 will show $75,000 meaning $1,000 has to be picked up as additional income. Even if you show $100,000 as deferrals in Box 12, the IRS will still only count $24,000 because that is the limit.  The excess is reported so that the IRS knows to look for the corresponding distribution and taxes.  You pick up the excess as additional income, not wages.

1 hour ago, Vlad401k said:

2) How would that be reported on the 2017 tax return if he distributes the funds in 2018? Would $75,000 taxable income and $25,000 deferred be originally reported? What if the $1,000 excess distribution is made by April 15. How would that affect the tax return for 2017?

Same as above, it is still  counted as income but not wages for 2017 if distributed in 2018 (by April 15).  That is why you use code P to show that it was taxed in a prior year.