401k Fiduciary Won't Refund Over Contribution

Technical topics regarding tax preparation.
#1
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Client switched jobs. 401k deferrals exceed limit. The company administering the 401k is giving him a hard time. They state they have a March 1st deadline to refund excess contributions. Any ideas how he can get them to comply with his request for a refund?
Dave

Taxation is the price we pay for failing to build a civilized society. ~ Mark Skousen
 

#2
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SlipperyPencil wrote:Client switched jobs. 401k deferrals exceed limit. The company administering the 401k is giving him a hard time. They state they have a March 1st deadline to refund excess contributions. Any ideas how he can get them to comply with his request for a refund?

We have discussed the topic of leaving the over contribution in the fund, if the permissible period has passed, here is the thread: viewtopic.php?f=8&t=12065 . To summarize:

1 - You add the over contribution back to the income as an excess deferral in the year when it was over contributed.
2 - You leave the money in the fund until it becomes permissible to withdraw which is usually when the taxpayer reaches retirement age.
3 - You pay tax again on the over contribution and pay tax. You pay tax on the earning anyway.
4 - There is no 6% yearly exercise tax which applies to IRA not 401(k).
5 - The over contribution cannot be applied as next year's contribution (unlike HSA).

The only question I have is after many years after the taxpayer retire, she might have changed several employers, and the 401(k) has been rollover many times, how can she keep track of the over contribution, and what is the process to have 1099-R issued?

PS, reference from the IRS itself: https://www.irs.gov/retirement-plans/co ... -401k-plan .
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#3
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I had already told him to leave it in the 401k if he wasn't able to get it out by 4/18.

His two employers were of no help so he went directly to the 401k custodian, Fidelity. They were eager to help even though, due to the run around by his employer, he was past their date for making the withdrawal by the filing deadline. They put a rush on the request and cut him a check 4/14.
Dave

Taxation is the price we pay for failing to build a civilized society. ~ Mark Skousen
 

#4
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I don't believe this dynamic was affected by recent legislation (i.e. the SECURE Acts). Is that a fair statement?

I'm thinking about making a "tax season tips" eblast series. One of those could be a "check your W-2s if you had two or more W-2s during the year" that would go out the first week of February, at which point nearly everyone should have their W-2s.

Discovering this or HSA overcontribution during extension prep in April is way too late for most custodians.
 

#5
JAD  
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That sounds like a good tip for the e-blast. I haven't heard anything re the secure act on this issue.

What happens if the over-contribution is discovered after the SOL has passed? Does the taxpayer avoid the double taxation of losing the deduction (SOL passed) and then paying tax on the distribution?
 

#6
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My understanding matches this thread. Before 4/15 in year 2, the client pays tax on the excess once. After that date passes, the client pays tax on the excess twice. Once in the year of overcontribution and then again when the excess if distributed.

I agree with Slippery that if the deadline has passed there's no longer any incentive to withdraw the excess and the client should just leave it in there.
 

#7
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JAD wrote:That sounds like a good tip for the e-blast.


I think so too. :) Something short that warns clients about this, and says if you received two or more W-2s for last year, add up these boxes and compare to these amounts. If it's more than the amount, we have a problem, contact me asap.

For proactive clients there's no good reason this should be uncovered in April.
 


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