Retirement Plan OverContributed

Today TaxMama hears from Melanie in Louisiana, who tells us, “We received a 2005 1099 R with a distribution code of P because our 401K at work was “lopsided” . The form said we should file an amended return both state and federal for 2004, which we did by April 15. Now we are receiving notices for penalties and interest from 2004. Is that correct? Can they do that? Can I appeal?”

Dear Melanie,

That’s so unnerving. And completely annoying when you get those 1099-R’s because the retirement
plan wasn’t tested until after the year ended.

But that’s what happened, so…. here’s what you do.

Do you still have the envelope showing the postmark date? Gather it and the letter you were sent, which should show the date it was written.

Write a reply to the notice you received that assessed the penalties. Explain to IRS that you just received the notice. It is not
a) Late filing – it is timely – you filed the amended return when you received the notice. So, late filing penalties should not apply. Enclose a copy of the postmark and the letter.

b) It’s not under-reporting – you had acted in good faith, never expecting your employer to do this to you.
So you should not be charged late payment penalties.
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You paid all the taxes on all the income in a timely fashion.

However, you will be responsible for the interest.

That won’t go away.

If IRS doesn’t waive the penalties the first time, try again.

Sometimes, it takes two or three letters and perhaps one phone call.

And if you have to make the calls on company time, your employer really has no right to complain. You
wouldn’t have this problem at all if they had done their testing in a timely manner and spent more time recruiting the lower-paid employees into the plan.

Heck, this probably affected everyone who contributed the maximum to the plan. So if your company were really smart, they’d have someone in human resources call IRS and arrange to waive the penalties for everyone involved. That way, only one person sits on hold with IRS for hours, instead of each employee. Just a thought. It would increase productivity and reduce stress, overall.

Oh yes, and do you see how much you’ve over-contributed? If this is consistently happening at your company each year, simply reduce your plan contributions to avoid overpaying in the future.

Incidentally, your question did give me an idea about a correction to the whole system that I forwarded to IRS.
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