Where do I put my Highly Compensated Employee 401k Refund on my 1040?

Question

For the year 2006, I made my full $15,000 contribution to my 401k plan. Unfortunately a couple weeks ago, my plan administrator sent me a check for a portion of that because the plan failed the "test". Since I was a highly compensated employee (HCE), they had to refund part of my contribution. I got the check, but my W2 still has the deduction for the full amount.

Where am I supposed to account for the refunded amount on my federal taxes? Also, I got the refund in March 2007 for the tax year 2006. Which year is that amount taxable in -- 2006 or 2007?

Answer 1

You will receive a 2006 1099R for the distribution. It will have a code 8 in Box 7. The code means it is a corrective distribution for 2006.

Enter the data from the 1099R exactly as shown. The corrective distribution will be added to Line 7 of Form 1040.

This distribution will not appear on the line for normal distributions. It is not subject to the 10% penalty.

If there are earnings from the distribution, that will appear on a separate 2007 1099R. Earnings received in 2007 are reported in 2007. The same code appears in Box 7.

Answer 2

Depends...did they get it out by March 15? If so then it's prior year taxable. Earnings are 2007 taxable. If they got it out after March 15 then company pays 10% excise tax and both are 2007 taxable.

treat it as if it's a regular distribution (line 16 I believe) but the 10% early withdrawal penalty doesn't apply. In effect it's a wash....you get the deduction but you also get taxed on same amount.