TSP limit exceeded in 07

[purirb123]

I was in between two jobs. My previous employer deducted $14000 and current(fed) $8000. It was mistaken on my part since I did not estimate right. Now I have excees contrbution of around $2000. I need to get it out of TSP and pay tax before April 15 2008 else I will have double taxation per my accountant. How do I do that. I called 800 number of TSP and they seem to not understand and I asked me to get form from TSP web site and I see no related form there.

I understand I need to get excess back from current employer and get a 1099R from them with proper distribution code there. It is not a normal withdrawal. Any advise on this forum.

 

[GGal]

If you are having difficulty with TSP on this matter, I believe you also have the option of withdrawing the excess from the other employer plan that you participated in....they may be easier to deal with:

Participation in plans of unrelated employers. If an eligible participant participates in plans of different employers, he or she can treat amounts as catch-up contributions regardless of whether the individual plans permit those contributions. In this case, it is up to the participant to monitor his or her deferrals to make sure that they do not exceed the applicable limits.

Example: If Joe Saver, who’s over 50, has only one employer and participates in that employer’s 401(k) plan, the plan would have to permit catch-up contributions before he could defer the maximum of $20,500 for 2007 (the $15,500 regular limit for 2007 plus the $5,000 catch-up limit for 2007). If the plan didn’t permit catch-up contributions, the most Joe could defer would be $15,500. However, if Joe participates in two 401(k) plans, each maintained by an unrelated employer, he can defer a total of $20,500 even if neither plan has catch-up provisions. Of course, Joe couldn’t defer more than $15,500 under either plan and he would be responsible for monitoring his own contributions.

The rules relating to catch-up contributions are complex and a plan participant’s limits may differ according to provisions in the specific plan.

Treatment of excess deferrals. If the total of a plan participant’s elective deferrals is more than the limit, a plan participant can have the difference (called an excess deferral) returned to the participant from any of the plans that permit these distributions. A plan participant must notify the plan by April 15 of the following year of the amount to be paid from the plan. The plan must then pay the participant that amount plus allocable earnings by April 15 of the year following the year in which the excess occurred.

Excess withdrawn by April 15. If a plan participant withdraws the excess deferral for 2005 by April 15, 2006, it is includable in the participant’s gross income for 2005, but not for 2006. However, any income earned on the excess deferral taken out is taxable in the tax year in which it is taken out. The distribution is not subject to the additional 10% tax on early distributions.

Excess not withdrawn by April 15. If a plan participant does not take out the excess deferral by April 15, 2006, the excess, though taxable in 2005, is not included in the participant’s cost basis in figuring the taxable amount of any eventual distributions from the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan.

Reporting corrective distributions on Form 1099-R. The plan must report corrective distributions of excess deferrals (including any earnings) on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

Refer to Publication 525, Taxable and Nontaxable Income, for more information about limits on elective deferrals.

 

[purirb123]

My previous employer is to small and I do not get much cooperation from them, I have tried calling them and they simply told me estimate and pay taxes on excess on your 1040 and leave the money in the plan i.e they are not willing to go thru the hassel of issuing check and 1099-R. I know this is wrong any excess needs to be taken out and taxes paid. It can not be left in the plan and let grow tax deferred. That is how the plan was set up.

Can you tell me what form to file with TSP for this kind of transaction? TSP customer care told me some form will be available in a week or two and I should fill in that form and send them. I need to withdraw for correction than for any other reason so 1099-R needs to show correct code also for withdrawal. Thanks.

 

[Birchtree]

I probably shouldn't say this but this small patato of $2000 will blow right past the IRS. Just don't exceed your contribution for 2008 and it will even out - that will prove you have good intentions to be honest. Double taxation on $2000 will give you one tank of gas - don't worry. Another point is that GGal works for the IRS so remain incognito if possible. Don't tell her any of your secrets.

 

[Miss_Piggy]

.... Another point is that GGal works for the IRS so remain incognito if possible. Don't tell her any of your secrets.

 

[GGal]

Pur,

I checked the instructions at TSP.gov, and unfortunately only found the form for withdrawals for hardship, etc. I saw nothing about excess contributions. I think you are going to have to call them back and offer to fax them the write-up that I sent you above, which came off the IRS website. The problem is, as far as they (TSP) are concerned, you don't have any excess contributions because they are not privy to your other employer's information.

You can see that because of that, it is your responsibility. If, by some magical reason, you had made excess contributions to TSP, their system would of course catch that, and they would be required to distribute the excess. But because no excess contribution was made to their plan, the ball is entirely in your court.

LOL, to Birchtree. I was previously tempted to make some similar comment, but did not, because there is risk involved.

The reason the IRS should catch it, is because when they input your tax return, they should see on your two forms W-2 that you exceeded the deferral limit. And if they catch it, you would be end up paying double tax as well as a 10% penalty. Whether they would catch it or not, I can't say. You are dealing with humans as well as computers.

So, it is simply a matter if you are willing to risk it. Legally, if you don't do the withdrawal by April 15, there is a form you are required to file (I forget the number, it starts with a 5 and has 4 digits, your accountant will know). And of course as an IRS employee I must encourage you to do what is legally required (make the withdrawal, or file the form properly and pay the proper tax and penalty).

My suggestion is to call the TSP back and insist that they tell you how to get them to distribute your excess contribution by April 15. Tell them that the instructions on their website only address early withdrawals for financial hardship. Insist on speaking with a manager.

Remember, the ball is in your court and it is entirely your responsiblity, because neither employer plan knew that excess contributions were being made. Further, even if excess contributions had been made into one plan, while the plan would be legally responsible to make the distribution or be in violation of plan regulations, the participant is still solely responsible for the tax and penalty.

In the meantime, I will go back to TSP.gov and look some more, to see if I missed anything there.

Update: I looked again at TSP.gov, and they only have information regarding in-service withdrawals for age based withdrawals and for financial hardship.

You are going to have to call them back and insist on speaking with someone who has a little more knowledge, because this is an entirely different animal, because of how it is taxed. The withdrawals they are talking about are taxed in the year the distribution is made. Where as the distribution of excess contributions is taxed in the year the excess contribution was made I believe.

You see what the problem is. You have an unusual situation and you are just going to have to talk to the right person.
GGAL

 

[James48843]

If the Thrift Line were government employees, they would know what you are talking about, and would help you.

Unfortunately the Thift Line is now manned by contractors, not government employees. So if it is not in the contract, you are bound to find roadblocks.

Keep asking, keep calling, and when they can't fix it, call the Thirft Board in D.C. and tell them that their Contractor cannot answer your question, or help you to do what is necessary to meet IRS requirements.

And copy each member of the ETAC with your e-mail- and ask them why the contractor at the Thrift Line is incapable of meeting IRS requirements to help you.
( and copy Tracey Ray at the Thift Board. Perhaps she can help you).

 

[GGal]

Pur and Bir,

I just remembered another way the IRS should catch the excess deferral:

Every person who receives even one information document (there are many types of these, but the most well known are the form W-2, 1099, and K-1 - there are of course many others), has an annual IRP, which is an Information Document Report. I have one, you have one, and everyone on this board has one.

The IRP is a detailed listing of every item reported on each information document the person received. There is a separate page for every document. The W-2 page for each W-2 received shows the detail of every box on the W-2. Since all of this detailed information is entered into the computer, we should surmise (however, we don't know) that the computer software is designed to flag excess deferrals. I do know that the software is designed to match specific items per the IRP to the 1040 and flag any discrepancies there, so it is not a stretch for me to surmise that the system is designed to flag excess deferrals.

 

[Birchtree]

I still think I'd run the gauntlet with the IRS - if their computers kick you a letter then just pay the penalty with interest and move on. There are worse things to worry about.