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What is the penalty for a 401k overpayment? Does the overpayment have to be backed out, or can it be rolled?

Zev
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You will have to get a complete copy of the Plan Statement to see how the overpayment will be treated.
My employer's Plan returns the overpayment in the next plan year as taxable income.

Phil

.02 for SOS
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Zev asks:

<<What is the penalty for a 401k overpayment? Does the overpayment have to be backed out, or can it be rolled?>>

If by the term "overpayment" you mean an excess contribution to a participant's account, failure to remove that excess and any income thereon may result in plan disqualification and a 10% penalty to the employer. The excess contribution and income allocable to that contribution must be paid out to the participant. That refund is ineligible for transfer to an IRA and it will be taxed to the plan participant.

Regards…..Pixy
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If by the term "overpayment" you mean an excess contribution to a participant's account...

Not exactly. I switched jobs this year and I made 401k contributions through both employers. So, between both employers, I've contributed more than $10,000 for this year. Is this a problem?

Zev
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Zev asks:

<<I switched jobs this year and I made 401k contributions through both employers. So, between both employers, I've contributed more than $10,000 for this year. Is this a problem?>>

To either plan, there's no problem. To you, there is a slight glitch. If no action is taken by you, then you must declare the excess contribution as income and pay taxes on it. You will pay taxes on the same amount again when it's withdrawn many years hence. Beyond that, there is no penalty.

If you wish to correct the situation, you must ask one or the other of the plan administrators to make a corrective distribution of the excess deferral. The plan documents must allow the corrective distribution, but neither plan is required to do so. Additionally, the excess deferral corrective distribution must be requested by you in writing and occur prior to April 15, 1999. Otherwise the money stays in the plan. Note that any earnings on the excess deferral stay in the plan even if the excess is refunded to you.

Regards…..Pixy

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