In its 401(k) Excess Deferral Project, the Internal Revenue Service's Employee Plans Compliance Unitfound errors in elective deferrals reported in Box 12 of Form W-2, Wage and Tax Statement. The project sampled employers who filed Forms W-2 that showed some employees had elective deferrals in excess of the annual contribution limit.
Employers must report 401(k) elective deferrals in Box 12 of the Form W-2, using the code “D.” The IRS found that 75 percent of the employers in the sample needed to correct their Forms W-2.
Employers incorrectly reported as 401(k) elective deferrals in Box 12:
- Elective deferrals made to 403(b) or 457 plans.
- Other non-qualified amounts.
Employers also made errors in reporting Social Security wages and deferred compensation, and they used incorrect codes. Form W-2 filers can avoid some of these errors by following the Form W-2 instructions. To correct previously filed Forms W-2, employers filed over 26,000 Forms W-2C, Corrected Wage and Tax Statement.
After being contacted by the IRS, most of these employers became aware of software and data transmission problems when moving files back and forth with their third-party administrator or payroll vendor and took action to fix those problems for future W-2 filings.
Fixing Excess Deferral Errors
When an employee's elective deferrals exceed the annual limit during a calendar year, the employee must include the excess amount in income for the year in which it was contributed to the plan. The employee also is taxed on the earnings on the excess elective deferrals in the year the plan distributes them. If the plan doesn’t distribute the excess deferral by April 15 of the following year, the excess is taxable in both the year deferred and the year distributed.
Some employers in the sample had already recognized employees who had made excess elective deferrals to their plan. They corrected this by returning the excess deferrals and issuing a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This form is generally filed for each person to whom a distribution of $10 or more is made.
The IRS provides these resources:
Contacting the Employers Plan Compliance Unit
The IRS invites employers that have questions about how this project relates to their retirement plan to e-mail the Employers Plan Compliance Unit (firstname.lastname@example.org) and include “401(k) Excess Deferrals” in the subject line.