Excess 401k Contribution Earnings -- Who Gets Them?

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Topic Author
bouncyboglehead
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Joined: Thu Dec 17, 2015 9:10 pm

Excess 401k Contribution Earnings -- Who Gets Them?

Post by bouncyboglehead »

My wife had an excess 401k contribution of around $940 this year. Her payroll department made the error and sent additional money for an additional paycheck. They recognized their error in mid-February. The 401k provider withdrew $1080 (more because of match + earnings) and charged $50 for the withdrawal. They sent us a check for $1080. A week or two later, the 401k provider withdrew another $140 as "Forfeited Amount". My wife's payroll department says that this represents match and earnings associated with the $940. The payroll department said that they would reimburse $50 for the withdrawal fee.

Is this legal that they would take our earnings? What I can find online it says that we would get the earnings and get a 1098-R for the earnings. Should we put up a stink about getting the earnings?

Thanks.
lakpr
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Re: Excess 401k Contribution Earnings -- Who Gets Them?

Post by lakpr »

Not sure if it is worth a stink for $140, as after all, your wife works there ...

It also appears that the steps taken to correct the error are within the bounds of plan rules. If an employee contribution is removed, the employer MATCH and associated earnings must also be removed.
ShadowRegent
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Re: Excess 401k Contribution Earnings -- Who Gets Them?

Post by ShadowRegent »

If it had a loss, would you expect to pay them for the loss resulting from their error?

EDIT: Was this an error or just an excess contribution? If it's an excess contribution, the match funds are forfeited, but the earnings on the original amount are yours.
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Kevin M
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Re: Excess 401k Contribution Earnings -- Who Gets Them?

Post by Kevin M »

Yeah, that doesn't sound right. My daughter just went through something similar, due to switching jobs and not keeping track of total 401k contributions between both employers. Excess contribution was about $1,052, and she received a check for about $1,068. The latter amount shows as a withdrawal in her transaction history.

Tax software correctly caught the excess deferral of $1,052 and added it back to her income.

My web research indicates that she'll receive two 1099-Rs in early 2021. One with code P will be for the excess deferral, with the code P indicating that it was income for 2019. The other with code 8 will be for the earnings, which will be reported on 2020 tax returns.

If it hadn't been withdrawn by April 15, 2020, the $1,052 would also have been included in the 1099-R with code 8, and would have been taxed again.

Here are the 1099-R instructions related to this:
Excess deferrals.

Excess deferrals under section 402(g) can occur in section 401(k) plans, section 403(b) plans, or SARSEPs. If distributed by April 15 of the year following the year of deferral, the excess is taxable to the participant in the year of deferral (other than designated Roth contributions), but the earnings are taxable in the year distributed.
And later, in the instructions for the codes:
In addition, for the distribution of excess deferrals, parts of the distribution may be taxable in 2 different years. File separate Forms 1099-R using Code 8 or P to indicate the year the amount is taxable.
Now we just have to remember this and make sure the 1099-Rs are properly handled by the custodian in early 2021.

Kevin
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Topic Author
bouncyboglehead
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Re: Excess 401k Contribution Earnings -- Who Gets Them?

Post by bouncyboglehead »

ShadowRegent wrote: Tue Mar 03, 2020 4:36 pm If it had a loss, would you expect to pay them for the loss resulting from their error?

EDIT: Was this an error or just an excess contribution? If it's an excess contribution, the match funds are forfeited, but the earnings on the original amount are yours.
I would've expected me to take the loss in the case that I had a loss.

It was an excess contribution. Do you have any documentation on that so that she can send that along to payroll and ask for the money?
scubavol
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Re: Excess 401k Contribution Earnings -- Who Gets Them?

Post by scubavol »

I'm not seeing where you make a case that they "took your earnings." A forfeiture concerns the match, not the earnings. You don't get the match on a contribution that wasn't ultimately made. Your $1,080 was the contribution and earnings, not contribution, earnings, and match.

(Edit: you don't get the earnings on the match, either.)
Alan S.
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Re: Excess 401k Contribution Earnings -- Who Gets Them?

Post by Alan S. »

You didn't ask about the tax ramifications of this, but if you check her W-2 you will probably find that the Box 12 code amount for the 401k deferrals were over the limit by $940.

Tax programs will automatically add that 940 back to her taxable wages for 2019 (unless the excess was a Roth 401k deferral). She will not get a 1099R for 2019, and her W-2 will NOT be re issued.

Returned earnings will be taxable in 2020 and she will get a 1099R next January showing the taxable earnings for 2020. The earnings will be added to 2020 wage income, not as retirement plan distributions. The 10% early withdrawal penalty does not apply.

Again, these are excess elective deferrals, quite different from excess contributions.
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