How to fix an excess 401k contribution after employer acquisition?

But doesn't this mean they'll be double-taxed? Taxed when they contributed (since it wasn't pre-tax anymore after going over the limit) and taxed again when they get the 1099-R? Also, I thought you had until April 15 of the following year to correct excess contributions without penalty?

Great question about double taxation. The excess contribution was still made on a pre-tax basis initially (even though it exceeded the limit), so you weren't taxed on that money when it was contributed. When you receive the 1099-R this year, that will be the first time that money is considered taxable income. You're right about the April 15 deadline, but that's for a different correction method. If the correction had been processed before April 15 with the W2 being amended, the excess would be taxed in the year of contribution. Since we're now using the distribution method instead, the excess becomes taxable in the year of distribution, and no amendment is needed for the previous year.

Thanks for this explanation - it makes more sense now. Just to be clear, even though my W2s from last year show I went over the contribution limit, the IRS won't flag this as an issue since the correction is being handled through the 1099-R this year? And I won't face any penalties for the excess contribution as long as I report the 1099-R correctly?

Exactly. The IRS has systems in place to track these corrections. Your W2s show what actually happened (the excess contribution), and the 1099-R will show the correction was made. As long as you report the 1099-R properly when you file this year's taxes, you won't face penalties for the excess contribution. The 1099-R will have a special code (typically code "P" in Box 7) identifying it as a correction of an excess contribution, which signals to the IRS that this situation has been properly remedied. Just make sure you keep records of all this documentation in case there are any questions later.

How does taxr.ai actually work with something like this? Do they just give you advice or do they actually deal with the plan administrators for you? I'm in a similar situation where I think I overcontributed to both a 401k and Roth IRA last year due to a job change.

I'm skeptical about these tax AI services... do they actually know the specific procedures for different 401k providers? Each one seems to have their own processes and I've found most "generic" tax advice doesn't account for these differences.

They don't deal with the administrators directly, but they analyze your documents and tax situation to tell you exactly what should happen. In my case, they identified the exact regulation that applied to my situation and created documentation I could forward to my plan administrator showing the correct procedure. This was super helpful when the administrator was initially giving me incorrect information. Regarding specific procedures for different providers, that's actually where I found them most helpful. They don't just give generic advice - they look at your specific plan documents and identify which procedures apply to your situation. They explained why my plan administrator's initial approach would have resulted in penalty taxes and showed exactly which IRS regulations applied. The documentation they provided referenced the specific plan rules alongside the IRS guidelines.

Wait, how does this work? They just sit on hold for you? How do they transfer the call once someone answers? And is it secure to have some random service calling the IRS on your behalf? Sounds sketchy.

I don't believe this would actually work. The IRS needs to verify your identity before discussing your tax situation, so having a third party service wouldn't help. Plus, if this really worked, everyone would use it because getting through to the IRS is practically impossible these days.

They don't talk to the IRS for you - they just wait on hold and then call you when a representative picks up. You're the one who talks to the IRS directly. They basically monitor the hold music and when it changes or stops (indicating someone has picked up), their system calls your phone and connects you. You handle all the identity verification yourself. It's completely secure because they're not accessing any of your personal information or having conversations on your behalf. They're literally just waiting on hold so you don't have to. Think of it like having a friend dial the number and then hand you the phone when someone answers, except it's automated.

This is really helpful info I hadn't considered. The check I received was for exactly the excess amount ($1,350) minus the 10% withholding. Does that mean they didn't include any earnings, or would the earnings have been calculated into that amount? Should I specifically ask about the earnings portion?

Based on the amount you received, it sounds like they may not have calculated earnings separately, which is actually a mistake. Even a small excess contribution will generate some earnings while it was in the account. You should definitely call your 401k provider and specifically ask about the earnings on your excess contribution. Ask them how those earnings were calculated and how they'll be reported on your 1099-R. The correct procedure is to distribute both the excess contribution and its earnings. If they haven't properly accounted for the earnings, you might need to request an additional distribution specifically for those earnings. The provider should be able to calculate what those earnings were for the period the excess contribution was in your account.

That number has been impossible to get through on. I tried for weeks and never spoke to anyone. The wait times are insane or they just tell you to call back later.