Failing to Correct an Excess 401(k) Contribution May Have Consequences

Posted by Lee Reams Sr., BSME, EA on

One of our ClientWhys forum members asked what the options were where a client had changed jobs and total contributions to the 401(k) plans of the two employers exceeded the maximum allowable 401(k) contributions for the year. The client was aware of the excess and reported it to the plan administrator prior to April 1st (the plan’s due date for reversing additional contributions) expecting the plan administrator to distribute the excess prior to the April 15th deadline for making a corrective distribution. However, the plan administrator failed to make the corrective distribution by April 15. So now what happens?

Finding a citation as to what happens if her additional contributions are not returned by the deadline can be found in Pub 525, page 10. Also see Regulations 1.402(g)-1(e)(8)(i) & 1.402(g)-1(e)(8)(iii).

So, the way we understand it, the result of not correcting an excess 401(k) contribution by April 15 of the subsequent year is:

  • The excess is taxable in the year of the excess contribution (but not subject to the premature distribution penalty).
  • Whenever the excess is withdrawn it is taxable again (i.e. no basis is established by virtue of the excess being taxed).