What Happens If You Exceed the 401k Contribution Limit?

A 401(k) plan allows individuals to contribute a portion of their income on a tax-advantaged basis for retirement savings. The Internal Revenue Service (IRS) establishes specific limits on how much can be contributed each year. Understanding these contribution limits is important for effective financial planning and to prevent unintended tax consequences.

Understanding 401(k) Contribution Limits

The IRS sets annual contribution limits for 401(k) plans, which can change each year due to cost-of-living adjustments. For 2025, the elective deferral limit, which covers employee contributions under Internal Revenue Code Section 402, is $23,500. This limit applies to the total amount an individual can contribute from their pay to all 401(k) plans, whether pre-tax or Roth, across all employers in a given year.

Individuals aged 50 and over are eligible to make additional “catch-up” contributions. For 2025, the standard catch-up contribution limit is $7,500. A special catch-up limit applies for those aged 60 to 63, allowing an additional $11,250 in 2025, if the plan permits.

Beyond employee contributions, there is an overall defined contribution limit under Internal Revenue Code Section 415, which includes combined contributions from both the employee and the employer. This limit encompasses employee elective deferrals, employer matching contributions, and employer profit-sharing contributions. For 2025, the total combined limit is $70,000. For those aged 50 and older, including their catch-up contributions, this overall limit can be higher, reaching up to $77,500. These limits are designed to cap the total amount that can be added to an individual’s defined contribution plan account in a year.

Situations Leading to Exceeding Limits

Exceeding 401(k) contribution limits occurs inadvertently through several common scenarios. One frequent situation involves individuals contributing to 401(k) plans with multiple employers within the same tax year. The elective deferral limit applies to an individual’s total contributions across all plans, not per plan. Therefore, if an individual contributes the maximum to one employer’s plan and then starts a new job, contributing to a second plan, they can easily exceed the annual limit for employee contributions.

Mid-year job changes also commonly lead to over-contributions. When an individual switches employers, their new employer’s payroll system may not account for contributions already made to a previous employer’s 401(k) plan during the same year. This can result in contributions continuing at a rate that, when combined with prior contributions, pushes the individual over the annual deferral limit. Individuals are responsible for monitoring their total contributions across all plans.

Errors in calculating or applying catch-up contributions can also cause an excess. Incorrect eligibility determination or miscalculation of the allowed amount can lead to contributions exceeding the permitted limit. For example, contributing the catch-up amount when not yet age 50 would create an excess.

Employer contributions, such as matching contributions or profit-sharing, can contribute to exceeding the overall defined contribution limit under Internal Revenue Code Section 415. While employees typically have less direct control over employer contributions, a large employer contribution combined with an employee’s own deferrals can push the total annual additions beyond the limit. Furthermore, administrative or payroll errors by an employer can sometimes lead to unintended over-contributions, where more money is withheld and contributed than the employee intended or the rules allow.

Consequences of Exceeding Limits

Exceeding 401(k) contribution limits can lead to tax and penalty implications for the individual. If excess elective deferrals are not corrected by the individual’s tax filing deadline, including extensions, they are subject to double taxation. This means the excess amount is taxed in the year it was contributed and then taxed a second time when it is eventually distributed from the plan.

Any earnings attributable to the excess contributions are also taxable. These earnings are typically taxed in the year they are distributed from the plan. If the excess contributions and their earnings are distributed before the individual reaches age 59½, they may also be subject to an additional 10% early withdrawal penalty. This penalty is applied on top of the regular income tax due.

For the employer, uncorrected excess contributions can also pose issues. If the plan does not properly correct excess deferrals, it risks disqualification of the entire plan or may incur excise taxes. This provides a strong incentive for plan administrators to identify and correct excess contributions promptly. Ultimately, the burden of addressing and facing the consequences of excess contributions largely falls on the individual participant.

Resolving Excess Contributions

Resolving excess 401(k) contributions requires specific actions to mitigate potential tax penalties. The first step is to promptly notify the 401(k) plan administrator or human resources department about the over-contribution. This allows the plan to initiate the corrective distribution process.

For excess elective deferrals under Internal Revenue Code Section 402, the crucial deadline for correction is the individual’s tax filing deadline for the year the excess occurred, including any extensions. If the excess is distributed by this deadline, the individual typically avoids double taxation. The distributed excess contribution is considered taxable income in the year it was originally contributed, and any earnings on that excess are taxable in the year of distribution. The plan administrator will report this distribution on Form 1099-R.

If the overall defined contribution limit under Internal Revenue Code Section 415 is exceeded, the plan administrator is generally responsible for correcting the issue. This correction usually involves returning the excess amount to the employee. The plan should also adjust any affected tax forms, such as a corrected W-2, to reflect the proper taxable income. Failure to correct excess contributions by the April 15 deadline following the year of the excess can result in the excess being taxed in both the year of contribution and again upon eventual distribution.