How to Handle 402G Excess 401k Contribution Made in 2023

Wait, so just to make sure I understand - the actual excess contribution amount ($364) isn't taxed again, but any earnings on that money would be taxed for 2024? I had a similar situation but I'm confused about box 2a on my 1099-R. It shows an amount that's actually larger than what I over-contributed. Does that mean they're including both the excess and the earnings in that box?

That's exactly right - the $364 excess contribution amount isn't taxed again since it was already included in your 2023 W-2 income. Only the earnings portion is taxable for 2024. Regarding Box 2a showing an amount larger than your excess contribution - yes, that typically means they're including both the excess deferral amount plus any earnings on that amount. When you enter this in your tax software, it should ask if this distribution was a return of excess contributions. When you indicate yes, the software will only treat the earnings portion as taxable for 2024, not the entire amount in Box 2a.

How does the system know the difference between the actual excess contribution and the earnings? My 1099-R just has one total amount in box 1 and the same amount in box 2a. There's no breakdown anywhere.

I'm always skeptical of tax tools. Does it actually explain the IRS rules behind the calculations or just give you an answer without showing its work? I need to understand WHY something is being done a certain way.

The system can tell because of the Code E in Box 7 - that's specifically for excess deferrals. It automatically knows that the difference between your reported excess contribution amount and the total distribution is the earnings portion. When you input both values, it calculates the proper taxable amount. Regarding your question about explaining the rules - that's actually what I liked most about it. It doesn't just give you the answer but provides the exact IRS references and explains the reasoning behind each calculation. For my situation, it cited the specific sections of the tax code dealing with 402G violations and corrective distributions, then explained in plain English what that meant for my tax return.

How does this actually work? Are they just calling the IRS for you or what? Seems too good to be true since I've literally spent hours on hold before giving up.

Yeah right, there's no way to skip the IRS phone queue. They put everyone through the same system. This sounds like a scam that's just going to take your money and leave you in the same place.

They use a system that navigates the IRS phone tree and holds your place in line. When an agent picks up, you get a call connecting you directly to that agent. It's not skipping the queue - you're still in the same line as everyone else, but you don't have to personally wait on hold. It's definitely not a scam. When I was dealing with my 402G excess contribution confusion, I needed specific guidance from the IRS rather than general online advice. The agent I spoke with walked me through exactly how to report the 1099-R with code E and confirmed I didn't need to amend my previous year's return. Since the call was recorded (with my permission), I even had documentation of the advice I received in case there were ever questions during an audit.

Is there a specific form or worksheet we need to include with our tax return to explain the 402G excess contribution correction? I've entered everything in TurboTax but want to make sure I have proper documentation if I get audited.

There's no additional form you need to file with your return for 402G excess distributions. The 1099-R with code "E" is sufficient documentation. TurboTax should handle the calculations correctly when you identify it as a return of excess contributions. The software will automatically exclude the principal amount from taxation while including the earnings portion as income for the year you received the distribution. If you're concerned about documentation, you could print out the 1099-R and keep it with your tax records, along with any communication from your plan administrator about the excess contribution removal.

I had this exact situation with a $490 excess contribution in 2022, and I received a notice from the IRS about a year later asking for clarification. I sent them a copy of my 1099-R showing code E and a letter explaining the situation, and they accepted it without any issues. I think what happened is their automated system initially flagged it as potentially unreported income.