How to Handle a 401k Excess Contribution

A 401k excess contribution occurs when the amount you defer from your salary into your retirement plan exceeds the annual limits set by the Internal Revenue Service (IRS). This can arise for several reasons, particularly for individuals who change employers or hold multiple jobs. The process to fix it is well-established. Understanding the steps to correct the error is important to avoiding negative tax implications.

Identifying a 401k Excess Contribution

The primary step in managing your 401k is understanding the contribution limits, which are defined by the IRS and adjusted periodically for inflation. For 2025, the elective deferral limit for employees is $23,500. This figure represents the maximum amount of your own salary you can contribute across all 401k and similar plans within a single calendar year.

Individuals age 50 and over are permitted to make additional “catch-up” contributions. For 2025, the standard catch-up limit is $7,500. A higher limit of $11,250 is available for individuals aged 60, 61, 62, and 63, provided their plan allows for it. This brings the potential total contribution to $31,000 for those using the standard catch-up and $34,750 for those eligible for the higher amount.

Excess contributions happen when an individual’s total deferrals across multiple plans exceed the personal limit. For instance, if you change jobs and contribute $15,000 to each employer’s 401k, your total of $30,000 would be $6,500 over the 2025 limit. Similarly, contributing to a 401k and a solo 401k can lead to an overage, as the limit applies to the individual, not each plan.

Tax Consequences of Uncorrected Excess Contributions

Failing to correct an excess 401k contribution in a timely manner leads to double taxation. The over-contributed amount is first taxed in the year it was deferred because it does not qualify for pre-tax treatment and must be added to your taxable income for that year. The same funds are then taxed a second time when they are eventually distributed from the retirement account.

For example, if an individual over-contributed by $3,000 in 2025, that $3,000 is included in their 2025 taxable income. If left uncorrected, when that same $3,000 is withdrawn years later, it will be taxed again as part of the distribution.

The Correction Process for Excess Deferrals

Once you identify an excess elective deferral, you must notify your plan administrator of the amount you over-contributed. This notification should be made as soon as possible to meet the firm deadline for correction.

The corrective distribution must be completed by April 15 of the year following the over-contribution. Filing for a tax extension does not extend this specific deadline. Missing this date triggers the tax consequences discussed previously, so prompt communication with your plan administrator is necessary.

The plan administrator is responsible for calculating the exact amount of the corrective distribution. This distribution will consist of the principal excess amount you deferred, plus any investment earnings attributable to that excess amount. If the funds experienced a loss, the distributed amount would be adjusted downward accordingly.

Tax Reporting for Corrective Distributions

After you have received the corrective distribution, you must report it correctly on your income tax returns. The tax treatment is split between the principal amount and the earnings. The returned excess contribution is considered taxable income for the year in which the contribution was originally made, not the year it was returned. For instance, a $2,000 excess contribution from 2025 that is distributed back to you in March 2026 is reported as income on your 2025 tax return.

The earnings portion of the distribution, however, is taxed differently. Any gains attributable to the excess contribution are considered taxable income in the year they are received. Following the same example, if the $2,000 excess generated $100 in earnings, that $100 would be reported as taxable income on your 2026 tax return.

Your plan administrator will issue IRS Form 1099-R to report the corrective distribution. Understanding the codes in Box 7 is essential for proper tax filing, such as Code 8 or Code P. You might receive two separate 1099-R forms for the principal and the earnings. The 10% early withdrawal penalty generally does not apply to the principal or the earnings from a timely corrective distribution.

Handling Excess Contributions After the Deadline

Discovering an excess contribution after the April 15 correction deadline places you in a more difficult tax situation. The primary consequence is that the excess amount becomes subject to double taxation. The funds were already taxable in the year of the contribution, and because you missed the deadline, the amount will be taxed again when it is eventually withdrawn from the plan.

Even though the opportunity for a clean correction is gone, the excess amount should still be withdrawn. The process for removing the funds after the deadline is handled as a normal, taxable distribution. You will need to contact your plan administrator to request the withdrawal of the specific excess amount. This action does not reverse the double taxation of the principal.