It is not uncommon for individuals to have multiple employers, each with a 401(k) plan. This can possibly create a situation where the employee makes an excess elective deferred compensation contribution. The maximum annual contribution is $18,000 ($24,000 if age 50 and over).
The limit does not just apply to each 401(k) plan to which the employee makes elective deferrals, but instead applies to the aggregate amount of all the elective deferrals made by the employee for the year to all plans which permit such contributions, including:
- Code Sec. 401(k) deferred compensation plans,
- Code Sec. 408(k) SEP IRAs,
- Code Sec. 408(p)(2) SIMPLE Plans, and
- Code Sec. 403(b) annuity plans (TSAs)
However, Code Sec. 457 plans (government plans) are not included in the overall deferral limitations.
The excess deferral is taxable as wages unless a corrective distribution of the excess is made.
Correcting Excess Contributions - After the close of the tax year, but not later than April 15 (or earlier as specified in the plan), the taxpayer may notify each plan under which elective deferral contributions were received by the plan for the year. The notification must also identify the extent, if any, the contribution consisted of designated Roth contributions (Reg. Sec. 1.402(g)-1(e)(2)(i)). No later than April 15 after the close of the taxable year, the plan may distribute the excess and any earnings associated with the excess contribution to the taxpayer (Reg. Sec. 1.402(g)-1(e)(2)(ii)). The excess is taxable to the plan participant in the year of deferral, but the earnings are taxable on the return of the year distributed. However, if the distribution occurs after April 15, the excess is taxable in the year of deferral and the year distributed, while the earnings are taxable in the year distributed. Neither the distribution of the excess deferral nor the associated earnings are subject to the early distribution penalty of Sec 72(t).
Box 7 of the Form 1099-R that reports the corrective distribution will show code 8 if the amount is to be reported on the return for the year the deferral was corrected or code P if the income is reportable for the year the deferral occurred. For example, if a 2016 Form 1099-R has a code 8 in Box 7, the income is to be reported on the 2016 return, but if Box 7 is coded P, the income is reportable on the 2015 return.
Example: Sam is a 45 year old individual who participates in employer Y's qualified cash or deferred arrangement. For January through July Sam deferred $12,800 into Y's qualified cash or deferred arrangement. Sam subsequently leaves employer Y’s employment and begins working for employer Z. During the remainder of 2016, Sam defers an additional $6,000 under Z's qualified cash or deferred arrangement. Sam’s elective deferral contributions for 2016 total $18,800. Since Sam is under age 50, Sam’s maximum allowable contribution for 2016 is $18,000 and he has $800 in excess contributions.