You make the callBy: NATP Research
May 19, 2022

Question: Your client has 401(k) plans with two different employers and over-contributed to his plans. These were pre-tax deferrals. The return has been extended, and you have just discovered the excess contributions. How can this be fixed?

Answer: The excess pre-tax deferral is included on Line 1 of Form 1040, U.S. Individual Income Tax Return.

Whether a corrective distribution can be made depends on the timing. The regulations indicate “not later than the first April 15 (or such earlier date specified in the plan) following the close of the individual’s taxable year, the individual may notify each plan under which elective deferrals were made of the amount of the excess deferrals received by the plan” [Reg. §1.402(g)-1(e)(2)(i)].

After April 15 (or an earlier date if specified in the plan), the excess cannot be withdrawn and will be taxed again when it is allowed to be distributed (e.g., client retires) [Reg. §1.402(g)-1(e)(8)(iii)]. Regardless of whether the taxpayer can make a corrective distribution, the excess pre-tax deferral must be included in income for the year of deferral.

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Our on-site team of tax professionals answers more than 20,000 questions each year on a variety of federal tax issues affecting your clients. Several of our tax researchers are CPAs and enrolled agents with broad tax knowledge and access to the most diverse research library in the industry.

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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.

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