The results of the IRS’ 401(k) Excess Deferral Project are in and they reveal a high failure rate for pretax contribution amounts that were reported on employees’ Forms W-2. The finding: 75% of employers needed to correct their W-2s.
Incorrect coding for Box 12. Employees’ pretax contributions into 401(k) plans are reported in Box 12 with Code D. The IRS, however, found that employers were also using Code D to report employees’ pretax contributions into 403(b) and 457 plans. The correct codes are Code E for 403(b) plans and Code G for 457 plans. To correct, file Forms W-2c/W-3c with the proper coding.
W-2s on which excess deferrals were reported. When employees’ pretax contributions exceed the annual limit ($17,500 for 2013), the excess must be returned to them and taxed. The excess deferral is taxable to employees in the year contributed. Earnings on the excess deferrals are taxable in the year the plan distributes them. Hitch: Unless plans make distributions by April 15 of the following year, the excess is taxable in both the year deferred and the year distributed. To correct, return the excess deferrals to employees and file Form 1099-R.
PRACTICE TIP: Identify employees whose pretax contributions may exceed the deferral limit and track their contributions carefully for the rest of the year. That way, you’ll know in real time who must receive a Form 1099-R at the end of the year.