A worker with two jobs overcontributed his 401(k)s by $5,000. He did
this intentionally because his employers matched his contributions.
How is this treated? I imagine the $5,000 will be taxed as ordinary
income. Is there a penalty? And how is this reported on his 1040?
Thanks for any enlightenment you may be able to share.
Stuart O. Bronstein wrote:
A worker with two jobs overcontributed his 401(k)s by $5,000. He
did this intentionally because his employers matched his
contributions.
How is this treated? I imagine the $5,000 will be taxed as
ordinary income. Is there a penalty? And how is this reported
on his 1040?
It looks like there is still time for the taxpayer to fix this.
<https://www.irs.gov/retirement-plans/consequences-to-a-participant
- who-makes-excess-deferrals-to-a-401k-plan>
Stan Brown <the_stan_brown@fastmail.fm> wrote:
Stuart O. Bronstein wrote:
A worker with two jobs overcontributed his 401(k)s by $5,000. He
did this intentionally because his employers matched his
contributions.
How is this treated? I imagine the $5,000 will be taxed as
ordinary income. Is there a penalty? And how is this reported
on his 1040?
It looks like there is still time for the taxpayer to fix this.
<https://www.irs.gov/retirement-plans/consequences-to-a-participant
- who-makes-excess-deferrals-to-a-401k-plan>
Yes, but the problem is that he doesn't want to fix it. He wants to
keep the excess contributions made by his employers, and thinks that
he will reap more than he will lose in penalties and additional
taxes.
Stan Brown <the_sta...@fastmail.fm> wrote:
Stuart O. Bronstein wrote:
A worker with two jobs overcontributed his 401(k)s by $5,000. He
did this intentionally because his employers matched his
contributions.
How is this treated? I imagine the $5,000 will be taxed as
ordinary income. Is there a penalty? And how is this reported
on his 1040?
It looks like there is still time for the taxpayer to fix this.
<https://www.irs.gov/retirement-plans/consequences-to-a-participantYes, but the problem is that he doesn't want to fix it. He wants to
- who-makes-excess-deferrals-to-a-401k-plan>
keep the excess contributions made by his employers, and thinks that
he will reap more than he will lose in penalties and additional
taxes.
Stuart O. Bronstein wrote:
Stan Brown <the_sta...@fastmail.fm> wrote:
Stuart O. Bronstein wrote:Yes, but the problem is that he doesn't want to fix it. He wants
A worker with two jobs overcontributed his 401(k)s by $5,000.
He did this intentionally because his employers matched his
contributions.
How is this treated? I imagine the $5,000 will be taxed as
ordinary income. Is there a penalty? And how is this reported
on his 1040?
It looks like there is still time for the taxpayer to fix this.
<https://www.irs.gov/retirement-plans/consequences-to-a-particip
ant - who-makes-excess-deferrals-to-a-401k-plan>
to keep the excess contributions made by his employers, and
thinks that he will reap more than he will lose in penalties and
additional taxes.
For any excess contribution that the employee makes and then
withdraws by Apr 15, don't the 401(k) plan administrators also
return the contribution's match to the employer?
A bit at:
https://www.quora.com/I-am-29-years-old-living-in-the-US-How-much-c an-I-contribute-to-my-401k-and-happens-if-I-exceed-that-amount
"honda.. @gmail.com" <honda.. @gmail.com> wrote:
For any excess contribution that the employee makes and then
withdraws by Apr 15, don't the 401(k) plan administrators also
return the contribution's match to the employer?
A bit at:
https://www.quora.com/I-am-29-years-old-living-in-the-US-How-much-c an-I-contribute-to-my-401k-and-happens-if-I-exceed-that-amountExactly. That's the point. The guy wants to keep the employer
contributions, so he's willing to pay a penalty and extra tax to do
that because he thinks he'll still come out ahead.
Is that the case? In one statute it says there's a 10% penalty on
the employer - I hope I'm reading that one wrong. But I just haven't
been able to figure out what the best advice for him is.
"honda....@gmail.com" <honda.lioness@gmail.com> wrote:
Stuart O. Bronstein wrote:
Stan Brown <the_sta...@fastmail.fm> wrote:
Stuart O. Bronstein wrote:Yes, but the problem is that he doesn't want to fix it. He wants
A worker with two jobs overcontributed his 401(k)s by $5,000.
He did this intentionally because his employers matched his
contributions.
How is this treated? I imagine the $5,000 will be taxed as
ordinary income. Is there a penalty? And how is this reported
on his 1040?
It looks like there is still time for the taxpayer to fix this.
<https://www.irs.gov/retirement-plans/consequences-to-a-particip
ant - who-makes-excess-deferrals-to-a-401k-plan>
to keep the excess contributions made by his employers, and
thinks that he will reap more than he will lose in penalties and
additional taxes.
For any excess contribution that the employee makes and then
withdraws by Apr 15, don't the 401(k) plan administrators also
return the contribution's match to the employer?
A bit at:
https://www.quora.com/I-am-29-years-old-living-in-the-US-How-much-c
an-I-contribute-to-my-401k-and-happens-if-I-exceed-that-amount
Exactly. That's the point. The guy wants to keep the employer contributions, so he's willing to pay a penalty and extra tax to do
that because he thinks he'll still come out ahead.
Is that the case? In one statute it says there's a 10% penalty on
the employer - I hope I'm reading that one wrong. But I just haven't
been able to figure out what the best advice for him is.
Is that the case? In one statute it says there's a 10% penalty on
the employer - I hope I'm reading that one wrong. But I just haven't
been able to figure out what the best advice for him is.
I don't see how either employer could be penalized - they did nothing
wrong. They were not aware of what the other was doing.
A worker with two jobs overcontributed his 401(k)s by $5,000. He did
this intentionally because his employers matched his contributions.
How is this treated? I imagine the $5,000 will be taxed as ordinary
income. Is there a penalty? And how is this reported on his 1040?
Thanks for any enlightenment you may be able to share.
On 3/16/22 11:23 AM, Stuart O. Bronstein wrote:
A worker with two jobs overcontributed his 401(k)s by $5,000. He didI have read all the replies posted through this morning. My comments are:
this intentionally because his employers matched his contributions.
How is this treated? I imagine the $5,000 will be taxed as ordinary
income. Is there a penalty? And how is this reported on his 1040?
Thanks for any enlightenment you may be able to share.
1. There is no 6% additional tax for an excess contribution to a 401(k).
If you think there is then you need to provide a citation as I can not
find it in the Regs or the instructions for Form 5329.
2. The penalty for not making a corrective distribution prior to the due
date of the tax return is double taxation.
2a. Because each employer is not aware that the taxpayer has an excess contribution they have no liability for not making the correction and no
W-2 would be issued.
2b. The taxpayer is responsible for adding the excess contribution to
the Wages line of the 1040 for the year of the excess contribution.
2c. The amount added to Line 1 of the 1040 does not create a basis in
the 401K.
3. The excess contribution will be taxed a second time when
distributions from the the 401K commence.
On 3/22/2022 12:51 PM, Tempuser wrote:
On 3/16/22 11:23 AM, Stuart O. Bronstein wrote:
A worker with two jobs overcontributed his 401(k)s by $5,000. He didI have read all the replies posted through this morning. My comments are:
this intentionally because his employers matched his contributions.
How is this treated? I imagine the $5,000 will be taxed as ordinary
income. Is there a penalty? And how is this reported on his 1040?
Thanks for any enlightenment you may be able to share.
1. There is no 6% additional tax for an excess contribution to a 401(k).
If you think there is then you need to provide a citation as I can not
find it in the Regs or the instructions for Form 5329.
2. The penalty for not making a corrective distribution prior to the due
date of the tax return is double taxation.
2a. Because each employer is not aware that the taxpayer has an excess
contribution they have no liability for not making the correction and no
W-2 would be issued.
2b. The taxpayer is responsible for adding the excess contribution to
the Wages line of the 1040 for the year of the excess contribution.
2c. The amount added to Line 1 of the 1040 does not create a basis in
the 401K.
3. The excess contribution will be taxed a second time when
distributions from the the 401K commence.
I concur, but still suggest the individual try to get one employer to
make a distribution to the individual of the excess.
On 3/22/22 1:08 PM, Taxed and Spent wrote:
On 3/22/2022 12:51 PM, Tempuser wrote:Please remember that Stuart B stated that the taxpayer believes his ROI
On 3/16/22 11:23 AM, Stuart O. Bronstein wrote:
A worker with two jobs overcontributed his 401(k)s by $5,000. He did >>>> this intentionally because his employers matched his contributions.I have read all the replies posted through this morning. My comments are: >>> 1. There is no 6% additional tax for an excess contribution to a 401(k). >>> If you think there is then you need to provide a citation as I can not
How is this treated? I imagine the $5,000 will be taxed as ordinary
income. Is there a penalty? And how is this reported on his 1040?
Thanks for any enlightenment you may be able to share.
find it in the Regs or the instructions for Form 5329.
2. The penalty for not making a corrective distribution prior to the due >>> date of the tax return is double taxation.
2a. Because each employer is not aware that the taxpayer has an excess
contribution they have no liability for not making the correction and no >>> W-2 would be issued.
2b. The taxpayer is responsible for adding the excess contribution to
the Wages line of the 1040 for the year of the excess contribution.
2c. The amount added to Line 1 of the 1040 does not create a basis in
the 401K.
3. The excess contribution will be taxed a second time when
distributions from the the 401K commence.
I concur, but still suggest the individual try to get one employer to
make a distribution to the individual of the excess.
will exceed the additional tax and double taxation. Well, there is no additional tax, just the double taxation. It is possible that the
taxpayer's ROI might be a better return even though the $5000 will be
taxed twice. If that extra $5K also triggered an employer match, then it
is quite possible.
Looks like the individual gets to keep the dough!
"Not later than the first April 15 following the close of the taxable
year, the plan may distribute ****to the individual**** the amount
designated under paragraph (e)(2)(i) of this section (and any income allocable to that amount)" emphasis added
26 CFR 1.402(g)-1(e)(2)(ii)
On Friday, March 18, 2022 at 11:00:09 AM UTC-5, Taxed and Spent wrote:
Looks like the individual gets to keep the dough!
"Not later than the first April 15 following the close of the taxable
year, the plan may distribute ****to the individual**** the amount designated under paragraph (e)(2)(i) of this section (and any income allocable to that amount)" emphasis added
26 CFR 1.402(g)-1(e)(2)(ii)
If the above CFR section said, "... the plan ****shall**** distribute to the individual... ",
then I might agree with you.
But it does not.
I think the plan's documents determine whether the croo... uh, employee here gets to
keep the matching contribution.
On Friday, March 18, 2022 at 11:00:09 AM UTC-5, Taxed and Spent wrote:
Looks like the individual gets to keep the dough!
"Not later than the first April 15 following the close of the taxable
year, the plan may distribute ****to the individual**** the amount
designated under paragraph (e)(2)(i) of this section (and any income
allocable to that amount)" emphasis added
26 CFR 1.402(g)-1(e)(2)(ii)
If the above CFR section said, "... the plan ****shall**** distribute to the individual... ",
then I might agree with you.
But it does not.
I think the plan's documents determine whether the croo... uh, employee here gets to
keep the matching contribution.
On 3/22/2022 2:36 PM, Tempuser wrote:[snip]
Please remember that Stuart B stated that the taxpayer believes his ROI
I concur, but still suggest the individual try to get one employer to
make a distribution to the individual of the excess.
will exceed the additional tax and double taxation. Well, there is no
additional tax, just the double taxation. It is possible that the
taxpayer's ROI might be a better return even though the $5000 will be
taxed twice. If that extra $5K also triggered an employer match, then it
is quite possible.
It is like rolling the dice: will the employer return the excess to the individual, including the matching contribution? If so, I don't see how
his ROI could be better with double taxation. Of course, if the
employer decides to keep the matching contribution, that changes things.
But the section I cited said the excess is to be distributed to the individual.
Place your bets . . .
On 3/22/22 9:23 PM, Taxed and Spent wrote:
On 3/22/2022 2:36 PM, Tempuser wrote:[snip]
There are two employers and two employer plans. The $5000 excess hasPlease remember that Stuart B stated that the taxpayer believes his ROI
I concur, but still suggest the individual try to get one employer to
make a distribution to the individual of the excess.
will exceed the additional tax and double taxation. Well, there is no
additional tax, just the double taxation. It is possible that the
taxpayer's ROI might be a better return even though the $5000 will be
taxed twice. If that extra $5K also triggered an employer match, then it >>> is quite possible.
It is like rolling the dice: will the employer return the excess to the
individual, including the matching contribution? If so, I don't see how
his ROI could be better with double taxation. Of course, if the
employer decides to keep the matching contribution, that changes things.
But the section I cited said the excess is to be distributed to the
individual.
Place your bets . . .
most probably been caused by the sum of the contributions to two plans exceeding the taxpayer's allowable annual amount. Neither employer
would show an excess contribution. There would not be any return of an employer match as there is no return of any excess contribution.
Having considered all the comments on this thread, I believe the
taxpayer knew what he was doing. I bet the excess contribution is
likely mostly due to the employer's matching contribution, which
is free money. Double taxation on free money still nets free
money, especially if the second tax hit is after years of
earnings.
Taxed and Spent <nospam...@nonospam.com> wrote:
Yes, taxpayer did it on purpose because he wanted the extra employer contributions. If he withdraws his excess contributions he will have to inform the employers, so they will know to withdraw theirs as well.
If he doesn't withdraw, there's double tax on the excess amounts.
But I am exploring whether or not that is the only penalty. I'm not
certain that it is. But if it is, taxpayer found a loophole not
anticipated by the law or regulations.
As for an attorney's role here, I think the client should be told that, at this point,
failing to withdraw the excess deferrals at his own initiative could be seen as a willful attempt to evade or defeat the assessment (or payment) of a tax, and he could be criminally prosecuted. Penalties include jail time of up to five years and up to $250,000 of fines.
As for an attorney's role here, I think the client should be told that, at this point,
failing to withdraw the excess deferrals at his own initiative could be seen
as a willful attempt to evade or defeat the assessment (or payment) of a tax,
and he could be criminally prosecuted. Penalties include jail time of up to five years and up to $250,000 of fines.
The only comment I will make here is that there would not be any evasion
as long as the taxpayer declares the excess contribution as wages on his
tax return. This is something he is required to do even without a W-2
being issued.
I suggest advising Jones that the sum of his W-2s' Box 12, Code D
amounts, will exceed the 401(k) limit for the year. If the IRS is
paying any attention, it will notice this. Then employee Jones is
risking an audit. For said audit, it seems to me Jones ought to
hire an attorney.
On Friday, March 25, 2022 at 6:06:22 PM UTC-5, Alan wrote:
Elle wrote:
As for an attorney's role here, I think the client should be told that, at this point,The only comment I will make here is that there would not be any evasion
failing to withdraw the excess deferrals at his own initiative could be seen
as a willful attempt to evade or defeat the assessment (or payment) of a tax,
and he could be criminally prosecuted. Penalties include jail time of up to >>> five years and up to $250,000 of fines.
as long as the taxpayer declares the excess contribution as wages on his
tax return. This is something he is required to do even without a W-2
being issued.
In your opinion, does the approach you describe rely on the reality that the 401(k) plan administrator for Company X has no legal obligation to coordinate with the 401(k) plan administrator for Company Y to ensure that the total elective deferral is below the IRC 402(g) limit?
Might Company X's plan administrator even have a duty to // not // go snooping around to see if the employee is contributing to other
companies' 401(k) plans?
In other words, even if the IRS audited employee Jones and then took a further
step of cautioning Jones's two 401(k) plan administrators about possible ERISA violations, could the two plan administrators legitimately respond: "When it comes to excess contributions, plan administrators have no
duty to identify whether an employee is making contributions to other 401(k) plans. Our plan documents in fact require us to ignore other elective deferrals an employee may be making to other 401(k) plans."
If this is Alan's position, and using the assumptions Alan provided
(notably, the employee reports the excess deferrals as 'other wages'
income), then it looks like a loophole to my (layperson's) eyes.
I guess the only protection built in is the reality that employees who
have a 401(k) option tend to be full-time. That an employee would
be part-time at two companies with both companies offering
401(k)s to part-timers seems unlikely.
Under Alan's assumptions, I guess all my prior declarations
about how someone could get busted are wrong.
I would have thought this loophole would have received more treatment
on the net. At least, my talents are not refined enough to find more discussion of this loophole.
If anyone can poke holes in Alan's assertions, I am interested.
One would think there would be more on the net on the strategy
Alan described. There are tons of sites, including of course the
IRS site, that say not to go over the 401(k) plan "limits,"* and if
one does, to correct the excess deferrals by working with the
401(k) plan administrator to distribute the excess and so on.
Period. Some IRS sites even say this is the only option.
But I am becoming versed in how the IRS's attempts to make
its web site understandable to laypeople means things
get lost in translation from the federal statutes to the
eyes of those reading the IRS web site. At this point I have
no problem saying the IRS blatantly lies at times.
The only site I found that speaks of Alan's strategy qualifies
using this strategy with the phrase,
"If a plan permits..."
More at https://equitable.com/retirement/articles/make-the-most-of-your-401k
Obviously I am a little skeptical of proceeding per the approach
Alan describes on the Q.T. (Not that he is saying to proceed on the
Q.T.) If the employee does not check in with the plan
administrator about what he/she intends, or is doing then
it seems to me (as a mere layperson) that risks arise.
* "limits" is in quotation marks because the IRC does not call
them "limits." Internal Revenue Code 402(g) uses language
more like Alan's language.
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