2 W-2's, 2 full deferrals in the same year

Hi

I was asked the following by one of my CPA's for 2019.

"I have a client whom who has two W-2s and whom who is allowed to make catch-up contributions on her 401(K) contributions.  On one W-2, she has made traditional contributions of $25,000 and on the other W-2, she has made Roth contributions of $25,000.  Since she is limited to the $25,000, can she just have the money distributed to her in 2020 and have a 1099-R prepared"

Since one is deductible and the other is after taxes, how is this handled/corrected? I believe it is all for 2020 but which deferral is to be corrected?

Thank you for your comments.

Plan terms may cover the circumstances with respect to that plan’s treatment of deferral excess arising out of deferrals to two plans, so don’t overlook them.

I will certainly bring this up and see if there will be any provisions to overwrite the other.

Thank you

Updated info.

Client was an employee of X, Inc. and received a W-2 with full traditional deferral. After leaving, client started her own company Y, Inc. S-corp. Gave herself a W-2 and did Roth deferral, again full amount.

Other than I told the CPA to have each document checked, any other method for correction i.e. which one should be corrected first, traditional or Roth? This is important for taxation purposes. As the client just disclosed this double deferral, I doubt X, Inc. may do any corrections?

Any other suggestions? 

Thank you

22 hours ago, Jakyasar said:

Any other suggestions? 

Research the deadline for refunding excess deferrals.

It's pretty much up to the participant which plan they take the refund from, no?

Neither plan had any excess in and of itself.

8 hours ago, Bird said:

Research the deadline for refunding excess deferrals.

Yeah if these are 2019 deferrals that deadline passed a few months ago.

The upshot is if you pass the deadline you still need to include the excess deferrals in 2019 income, the questions which are the excess deferrals though? One was made pre-tax and gets a tax deduction, the other was made after tax and is already taxable in 2019. I think the IRS would probably rule you need to pick up the pre-tax but I don't know if there are any regs or other guidance on this situation.

An interesting question would be what if both plans were done as ROTH? if you miss the 4/15 deadline you need to leave it in the account but does that mean you got to double up your ROTH contribution for the year?

Because as BG correctly points neither of these Plans has a problem accepting the deferrals.

58 minutes ago, Lou S. said:

Yeah if these are 2019 deferrals that deadline passed a few months ago.

The upshot is if you pass the deadline you still need to include the excess deferrals in 2019 income, the questions which are the excess deferrals though? One was made pre-tax and gets a tax deduction, the other was made after tax and is already taxable in 2019. I think the IRS would probably rule you need to pick up the pre-tax but I don't know if there are any regs or other guidance on this situation.

An interesting question would be what if both plans were done as ROTH? if you miss the 4/15 deadline you need to leave it in the account but does that mean you got to double up your ROTH contribution for the year?

Because as BG correctly points neither of these Plans has a problem accepting the deferrals.

If you're past the April 15 deadline (which it appears you are), and these are two separate employers, which, again, it appears you are, then your client is simply taxed on the excess amount. If the system works as intended, the Roth and the non-Roth are added together by the IRS service center when W-2's are processed, and the excess (one entire deferral amount, on your facts, Jakyasar), will be added to her income. It doesn't matter whether you stack the Roth on top of the pre-tax, or other way around. The excess cannot be distributed until there is a regular distributable event with the plan. When the amount is distributed, it is includable in income, even to the extent it comes from Roth. See Treas. reg. 1.402(g)-1(e)(8)(iv). How the coordination between two separate plans of different employers is accomplished eludes me. Luckily, it appears that your client is in charge of her own plan, so presumably she can make sure it works as intended whenever she receives a distribution from the plan under her control.

Very interesting comments and thank you all.