Discussion:401K Overlimit Contribution Question
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CharlottesvilleAccountant (talk|edits) said: | 15 February 2007 |
| A client of mine is highly compensated and over contributed to his 401K in 2006 by 2,000. In January the company refunded the over contribution with earnings for a total of 2,200.
He recieved a 1099, for 5,000, with a date of 2006 this January. This amount was his 2005 over contribution that was paid to him in 2006, and that his company is telling me should have been reported as income on his 2005 return. (No 1099 was prepared until 2007) They are then saying that in 2008 he will receive a 1099 dated 2007 for the amount refunded in 2007 what should have been reported in 2006. I've not dealt with clients as highly compensated as he is, but does this sound right? He's getting a dated 1099 and isn't supposed to follow it? But isn't that what the IRS is going to get and check against? | |
Death&Taxes (talk|edits) said: | 15 February 2007 |
| Yes, check the code on the 1099R....it should say it was taxable in 2005. | |
Victor1530 (talk|edits) said: | 15 February 2007 |
| It does happen, and like D&T mentioned read up on it. What has actually happened is that according to the plan provisions for the 401K he failed the "test" because he is highly compensated. Others in the plan actually limit his contribution. The calculations on the plan are based on actual w-2 data for the year say "2005" but you wouldnt know that number until 2006 .......yes it is income on the 2005 return. Maybe a little wordy but that's the logic. Thats the way I do it and we have 2 very highly compensated owners. At some point your plan will have to change if the Highly comp emp continues to fail. | |
| February 15, 2007 | |
| And you get to do an amended return for the prior year, and charge for it. | |
CharlottesvilleAccountant (talk|edits) said: | 15 February 2007 |
| OK. So what y'all are saying is that the code P on the 1099 will tell the IRS that it was taxable in 2005, despite the 2006 date. And that we should receive the 2006 information, dated 2007. Looks like I'm gonna have to amend his 2005 too.
Thanks for the help. I've never had anyone this compensated before. | |
| February 15, 2007 | |
| Yep, you now get to add an amended return to your list every year for this guy...so build that into your fee for him. | |
CharlottesvilleAccountant (talk|edits) said: | 16 February 2007 |
| Well I'm the one that did last years return, so I don't think I can really charge for it.
But it raises another question. Where do I put this 2,000 he was refunded? Would it have been part of his W-2 gross? Or does it go somewhere else? | |
Death&Taxes (talk|edits) said: | 16 February 2007 |
| Check 2005 to see if you included it in wages; I have done so a number of times when I learn this in tax season. The income goes on Line 7, not as a pension distribution so you do not need the 1099. I usually put it on the Line 7 worksheet in Proseries. | |
CharlottesvilleAccountant (talk|edits) said: | 16 February 2007 |
| So 2,000 would have originially been on his gross wages, then taken out as a 401K contribution, so the 2,000 and the 200 it increased would need to be added onto income, line 7 of the 1040.
Just trying to think this through. I think it was one of those topics covered by the tax professor in five minutes because we'd never need to worry about it. | |
Death&Taxes (talk|edits) said: | 16 February 2007 |
| He probably should have told you this was happening last year, when you could have caught it on time. This sometimes happens also if a client has two 401Ks at two employers and they exceed the maximum. I tell them to have the money refunded, and I add it back to their wages. | |
| February 16, 2007 | |
| And do charge for it, there's usually no way to know the amount in time, you didn't miss a thing last year. They conduct the test, usually too late, and then refund the money in the current year, which is why it's on a current year 1099, but it IS prior year money and income to wages, hence the code P. You did nuttin' wrong. | |
CharlottesvilleAccountant (talk|edits) said: | 16 February 2007 |
| But how do you report it? | |
Death&Taxes (talk|edits) said: | 16 February 2007 |
| As I said before, the excess goes back on Line 7, wages. Explanation is that you are correcting the 2005 return to report the refund of a excess 401K deducted in 2005. For an experiment, open a 2006 return, and enter a 1099R with any amount and code it '8' which is the return of a contribution taxes in 2006.....see where it puts it. Bet it is on Line 7. | |
CharlottesvilleAccountant (talk|edits) said: | 16 February 2007 |
| In 2007 he's going to recieve a 1099R showing the return of the contribution and the earnings all as taxable income. Should I put that in like a 1099? | |
| 16 February 2007 | |
| You might be able to charge for the 1040X the first time, but once you know about it you should look for it each year. The overfunded amount must be refunded with earnings no later than 4/15/X2. So theoretically, the refund will result in income be attributable to two years, i.e., the principal gets added back to wages in 20X1 and the earnings gets recorded as income in 20X2. If necessary, put him on your extension list and prepare his return in summer. | |
