Summary: When switching companies it is the employee’s responsibility to ensure 401(k) deferrals do not exceed federal limits. When an amount in excess of the limit makes it into your retirement account, it is critical you act quickly. Talk with your HR rep. AND your 401(k) plan administrator to get the excess deferral returned to you. Failing to do so can result in double-taxation. You will need to report this on your taxes, the details of those requirements are below.
I will state here that I am not a financial or tax professional. This post merely documents my experience with this issue. For real advice consult a pro!
I Over Contributed to My 401(k)!
Well that was unexpected! Today marked my last paycheck of 2016. But despite my best calculations, I somehow messed up and missed the mark on my 401(k) contributions. By my estimates I over contributed about $600 beyond this year’s limit of $18,000. (I won’t know until Friday when the transaction posts to my account.)
About five weeks ago I decided to get my 401(k) contribution percentage prepared for 2017. When you do the change online it warns you it may take “1 or 2 pay cycles to take effect.” Well it showed up on the first pay cycle after the edit. I wasn’t too worried because last year the company cutting my paycheck, ADP, handled the limit just fine. They accurately cut my contributions at the limit – to the penny. I thought this year would be the same!
However this over contribution showed up because I accepted a new job and switched companies in July! Despite using the same payroll company at both jobs, apparently your contributions are tracked by company and not person. (?!) So now when I was expecting this final paycheck to be a certain calculated amount, it was a good amount less, but I was able to catch it the day of. (Yes. I’m an account hawk! 🙂 )
First Steps in Fixing a 401(k) Excess Deferral
This is new territory for me, so frankly, I don’t know. After a quick research I don’t see a penalty or loss of money about to happen. It looks like I have until tax day, four months from now, to right the situation. Failure to right this situation by the next day will result in double-taxation. That is certainly a situation to avoid.
My research dictates that I should contact my plan administrator to issue my refund and correct my balance. As I read it, my 401(k) administrator will return the money back to my company. At this point the over contributed money has not been taxed.
My company will then issue that money as normal income, and normal taxes will apply at that point. (Only sort of correct. More details below.) That income will count for this year, 2016. Any gains/losses will count as income as well, but for whatever year the check comes, likely 2017.
What if I was NOT so vigilant
If I did not catch this mistake, then I think I would have “lost money.” The excess contribution would count as income for 2016 (taxed at tax time) and then taxed again when the funds were removed from my 401(k). If you contribute to a Roth 401(k), then you already paid taxes going in. But, when you go to withdraw, until that first dollar beyond your excess contributions, you will be taxed again. For example, you have $50,000 in your Roth 401(k). You made an excess contribution of $500. When you withdraw $1,000 in the future, $500 is taxed as normal income, the other half is not, even though that whole $1,000 was taxed going into the account. Double taxed, just like the Traditional excess contribution.
Getting Your Excess 401(k) Deferrals Returned
Update from February 22nd, 2017
The situation is now sorted out; I am 99% that statement is true.
I popped into the HR office for a chat and was met with some odd questions. The conversation ultimately lead me to the conclusion that the company couldn’t do anything to help. At that point it was up to me to sort things out with the 401(k) administrator. HR did request that I “let them know what they say.” At least they wanted to learn!
After a short earful of advertisements and elevator music, the 401(k) representative picked up my phone call. Quickly – within seconds my explanation ending – the representative told me this needed to be sorted by my employer. Hmm?
Short email to the local HR person (who initially and still doesn’t know the next step) and I get in touch with someone in the payroll department. Her email inspires confidence immediately. She asks for the last pay stub from previous employer, and final pay stub from current company in 2016. Provided both PDFs and away we go!
A few later and *TA-DA* She did it! The plan administrator will be sending my over contribution back before the upcoming tax deadline. At this point I expect a standard check from my company with standard payroll taxes removed and ready for deposit. Wrong!
I get all $600 of my excess deferral, plus earnings on that money. I have not yet finished taxes, nor looked for electronic documents related to this mishap, but will update in the next few weeks once I do. Without doing any reading, I assume I will be taxed on this check at that point, since it came straight to me in full value.
Handling 401(k) Over Contributions at Tax Time
Update from March 28th, 2017
Our taxes were filed a few weeks back and in the process I finally got to sort out the details of handling over contributions to a 401(k) account. I still have some hesitation on how this is being resolved, but that is my inner-Columbo of needing to tie up all loose ends. (Hint: Even after filing taxes for 2016, the loose ends remain!)
As stated, the excess contribution needs to be returned before the next tax filing day to avoid double-taxation. This is straightforward, even if getting that check from the plan administrator requires a little hoop jumping.
I file taxes electronically with the help of TurboTax (not a plug – I have mixed fillings on Intuit). Even with their easy-peasy interface, I still had trouble digging up how to handle the situation. Normally it’s quite simple, as long as you have the correct documentation. However, here is the catch: Because my over contribution was returned to me in 2017, my tax statements won’t be available until next year!
For a distribution from your 401(k) account – no matter if for an excess correction or distribution because you are retired – you will receive a 1099-R form. This form will outline the amount, but more importantly contain codes for the type of distribution you received. For an excess deferral like mine, there will be two codes: ‘P’ for the amount in excess of the federal limit, taxable in 2016 (the year when the excess deferral took place), and ‘8’ for the earnings/losses on that excess deferral, taxable in 2017 (the year the check was cut).
So the issue I approached was how to handle this on my 2016 tax filing when I did not have the tax statements required, the 1099-R. After continued digging I was left with two recommended approaches:
- File my 2016 tax return as if I had my 1099-R form on hand
This meant filling in the worksheet with best guesses. Luckily, my plan administrator actually had some of these numbers, primarily the appropriate values for the distribution codes ‘P’ and ‘8’. In the end, this was the approach I took. Alternatively, I could have:
- File my 2016 tax return without entering any of these numbers. When I receive the 1099-R forms in 2018, amend my 2016 return.
I battled internally with which method to choose. The first approach gets the taxes paid, and does not require amending a return come 2018. The second approach pleased my senses of doing things with all required information on hand. Clean and efficient. Ultimately, the first one out, I didn’t want the thought of not paying taxes on time hanging over my head.
So now I sit here with an accepted 2016 tax return, and wait until early 2018 to receive my 1099-R statements. At that point I will likely provide one final update to this saga. And for anyone else going through this good luck and remain timely. This is a fairly easy mistake and likely quite common. There are systems in place to correct it, with no double-taxation required! 🙂