Does 401k Automatically Stop at the Limit?

Many people assume their 401(k) contributions automatically stop upon reaching the annual limit. While payroll systems are designed to manage these caps, their reliability often depends on your employment situation. For those who remain with a single employer, the system is effective, but changing jobs can lead to unintentional over-contributions.

How Payroll Systems Handle Contribution Limits

For an employee who remains with a single employer for the calendar year, the process is straightforward. An employer’s payroll system is programmed with the annual contribution limits set by the Internal Revenue Service (IRS) and will automatically stop deferrals once the maximum is reached. This automation prevents most employees from exceeding the limit.

For 2025, the maximum employee contribution to a 401(k) is $23,500. This limit applies to the total of pre-tax and Roth contributions and does not include employer contributions like matching funds or profit-sharing.

Individuals age 50 and over can make an additional “catch-up” contribution of $7,500, for a total of $31,000. A new provision for 2025 allows those aged 60 to 63 to make a higher catch-up contribution of $11,250, if their plan allows it. This brings their potential total to $34,750. Payroll systems should account for these higher limits for eligible employees.

Complications from Multiple Employers

The automated process breaks down when an employee works for more than one company in a year. Each employer’s payroll system operates independently and is unaware of contributions made to a previous employer’s 401(k) plan. The new system only tracks deferrals made at that company, creating a scenario where an employee can exceed the annual limit.

The responsibility for tracking total contributions across all employers falls on the employee. For example, if you contribute $15,000 at your first job, the payroll system at your second job will not know to stop contributions after you defer another $8,500. The new system will continue processing your elected deferral percentage, leading to an excess contribution.

To prevent this, you must be proactive. After starting a new job, review your year-to-date contributions from your previous employer’s final pay stub. You must then calculate the remaining amount you can contribute and adjust your rate at the new job, which may require instructing payroll to stop contributions at a specific dollar amount.

Correcting Excess Contributions

If you discover an over-contribution, you must act promptly to avoid negative tax consequences. Notify your plan administrator of the excess amount and request a corrective distribution. This distribution must include the excess contribution plus any earnings it generated.

There is a deadline for this correction. The excess contribution and its earnings must be withdrawn by April 15 of the year following the over-contribution. For an over-contribution in 2025, the deadline is April 15, 2026. Meeting this deadline avoids double taxation.

If the excess is returned before the April 15 deadline, the contribution is included as taxable income for the year it was made, while the earnings are taxed in the year they are withdrawn. If the deadline is missed, the excess amount is taxed in the year it was contributed and again when distributed from the plan. This missed deadline may also subject the amount to an early withdrawal penalty if you are under age 59 ½.