1099R Code 8

[hyacinth]

When an excess contribution has been made to a 401K, and it and its earnings are withdrawn by the due date of the tax return, is there a 10% penalty on the earnings?
I realize that tax is due on the whole amount, and that there is no penalty on the excess contribution withdrawn, but what about the earnings?

[Bees Knees]

IRS Instructions for Form 5329, page 2 says:

Note. Any related earnings withdrawn
with excess contributions are subject to
the additional tax on early distributions
if you were under age 591/2 at the time
of the distribution.

The note was made with reference to excess contributions to an IRA, but the following bullets include excess aggregate contributions to meet nondiscrimination requirements for employee contributions and matching employer contributions. The note I assume applies to excess contribution earnings from all of the ones mentioned in the bulleted list, not just IRAs.

[abby]

in theory and, sometimes, practice

A code 8 should cause the software to shoot the reported amount to wages - as it is not a pension distribution at all.

The earnings, if any, could/would/should be reported on a separate 1099-R as a code 1 premature distribution and would be subject to penalties.

[hyacinth]

1099 code 8

In practice my software includes a code 8 in retirement income not subject to penalty. The 401IK custodian did not differentiate between withdrawal of excess contributions and earnings, although a phone call to the custodian has determined that there were some earnings. I did see the reference to earnings on excess contributions to IRA, but did not know if it included a 401K taken out in a timely manner due to no fault of the employee.
No 1099 Code 1 was issued for the earnings.

[hyacinth]

sorry it does shoot it to wages

Sorry, it did shoot it to wages (I'm doing an amendment), but no 1099 code 1 was issued for the earnings.

[joanmcq]

Maybe there weren't any earnings during the period the overcontribution was in there.

[New York Enrolled Agent]

If this is an excess contribution (as opposed to an excess deferral) then I believe §408(k)(8)(D) will control.

§401(k)(8)(D): Additional tax under section 72(t) not to apply. No tax shall be imposed under section 72(t) on any amount required to be distributed under this paragraph.

I would infer from the word "any" that there would be no 10% penalty.

[hyacinth]

yes there were earnings

There were earnings. We called the 401K custodian to find out. This was a refund of contribution and earnings due to the rules for highly compensated employees. Would that make a difference?

[Bees Knees]

If this is an excess contribution (as opposed to an excess deferral) then I believe §408(k)(8)(D) will control.

§401(k)(8)(D): Additional tax under section 72(t) not to apply. No tax shall be imposed under section 72(t) on any amount required to be distributed under this paragraph.

I would infer from the word "any" that there would be no 10% penalty.

I agree. Section 401(k)(8)(A)((i) says the excess contribution and any income allocable to such contribution must be distributed in order for the plan not to be disqualified. Then Section 408(k)(8)(D) says the 10% penalty under Section 72(t) does not apply to any amount required to be distributed under this paragraph.

Thus, since both the excess contribution plus earnings are required to be distributed, neither is subject to the 10% penalty.

Thus, in regards to the instructions to Form 5329, page 2 that says the earnings on the excess contributions are subject to the 10% penalty, those instructions only apply to excess IRA contributions, not excess 401(k) contributions.

[New York Enrolled Agent]

. This was a refund of contribution and earnings due to the rules for highly compensated employees. Would that make a difference?

Then you do have an excess contribution and I believe §401(k)(8)(D) helps you.

If it was an excess deferral (N/A in your case) then the rules are in a different section §402(g)(2).

[abby]

I concur

and concede that a separate 1099 wouldn't be required in this situation - looks like it correctly all go to wages with no penalty

[hyacinth]

Thanks everyone

I really appreciate the response. This is the first time I've been involved in this and it was great.

[hyacinth]

Thanks

Thanks for the help. This is my first time on board and I really do appreciate it.

[Oxtrainer]

1099 Code 8

Do I understand correctly that a withdrawal of IRA Excessive funds has a 10% tax on
the earnings while a withdrawal of excessive 401K funds does not apply a 10% against
its earnings.?? I assume the earnings of both would forward to taxable income.

[tpnl]

Miller

My client received a letter that he is going to receive a check for excess contribution to his 401(K). Do I have to wait until he receives his 2007 tax forms (a 1099) to make the amendment to the 2006 return? Or do I want to wait to see what actually gets reported?