Fidelity Return of Excess Contribution 401k: How to Fix and Report It
Learn how to correct excess 401(k) contributions with Fidelity, understand tax implications, and ensure accurate reporting for future compliance.
Contributing too much to a 401(k) can happen for various reasons, such as employer matching exceeding the limit or miscalculating contributions. If this occurs, correcting the mistake quickly helps avoid unnecessary taxes and penalties. Fidelity has procedures to fix excess contributions, and understanding the process minimizes complications.
Fixing an excess contribution involves requesting a return of the extra funds, handling tax implications, and adjusting future contributions to prevent repeat issues.
Identifying Excess Contributions
Exceeding IRS contribution limits can lead to double taxation and other financial consequences. For 2024, the maximum employee contribution is $23,000, or $30,500 for those 50 and older, including catch-up contributions. Contributions beyond these limits must be corrected to avoid extra taxes.
Excess contributions often happen when contributing to multiple 401(k) plans in the same year without tracking the total amount. If you change jobs and both employers offer a 401(k), it’s easy to exceed the limit. Employer contributions, such as matching or profit-sharing, do not count toward the employee limit but do count toward the overall 401(k) cap, which is $69,000 in 2024 ($76,500 with catch-up contributions).
Monitoring contributions throughout the year helps prevent overages. Many payroll systems allow employees to set a cap, but errors can still occur, especially when switching jobs or receiving bonuses. Reviewing pay stubs and Fidelity account statements regularly ensures contributions stay within IRS limits. If you notice an overage, acting before the tax filing deadline prevents additional penalties.
Requesting a Correction from Fidelity
Once an excess contribution is identified, notifying Fidelity promptly helps prevent complications. The IRS requires excess deferrals to be withdrawn by April 15 of the following year to avoid double taxation. Fidelity allows employees to request a return of excess contributions through their online portal or by calling customer service. Providing details such as the overage amount and the year it occurred ensures accurate processing.
Fidelity returns the excess contribution as a distribution, including both the original excess amount and any associated earnings. The earnings portion depends on investment performance—if the market performed well, the returned amount may be higher; if investments declined, the refund may be lower. These earnings are taxable in the year the excess contribution is removed.
Processing times vary, but Fidelity typically completes withdrawals within a few weeks. Delays can occur if requests are submitted close to the tax filing deadline when many investors seek corrections. Checking the request status through Fidelity’s website or speaking with a representative ensures timely processing.
Tax Treatment of Returned Contributions
When an excess 401(k) contribution is withdrawn, the tax implications depend on both the original contribution and any earnings. Since 401(k) contributions are typically pre-tax, the excess amount remains taxable income for the year it was originally contributed. Even though the funds are returned, they do not reduce taxable income for that year. Instead, the excess is reported as wages on the individual’s W-2.
The earnings portion of the returned contribution is taxable in the year the excess is withdrawn. These earnings are taxed as ordinary income and must be reported on the tax return using Form 1099-R, which Fidelity provides. Unlike early 401(k) withdrawals, the earnings portion of a returned excess contribution is not subject to the 10% early withdrawal penalty, as the IRS requires these funds to be removed.
Correcting Future Contributions
Preventing excess contributions requires careful planning, especially when managing multiple employer-sponsored plans. Setting contribution limits within payroll systems, reviewing IRS thresholds, and adjusting for salary increases or bonuses can help avoid overages. Employers often allow changes to deferral percentages throughout the year, making it possible to modify contributions as income fluctuates.
For those contributing to multiple employer plans, tracking total contributions is essential, as the IRS limit applies across all 401(k) plans combined. Consolidating retirement accounts or using financial planning software can provide a clearer picture of total deferrals. Individuals with side income contributing to a solo 401(k) must also ensure elective deferrals do not exceed limits when combined with contributions from a primary employer-sponsored plan.
Documenting the Correction on Your Retirement Statements
After Fidelity processes the return of excess contributions, reviewing retirement statements ensures the correction is properly recorded for tax reporting and financial planning. Fidelity updates account statements to reflect the distribution, but discrepancies can occur, especially if the correction is processed close to the tax filing deadline.
Fidelity issues a Form 1099-R for the earnings portion of the returned contribution, which must be reported as taxable income for the year in which the excess was withdrawn. This form should match Fidelity account statements. Additionally, the W-2 from the employer should include the original excess contribution as taxable wages. If these documents do not align, contacting Fidelity or the employer’s payroll department can help resolve inconsistencies before filing a tax return.