Will My 401k Contributions Automatically Stop at the Limit?
Understand the systems that manage your 401k contributions. Learn how payroll, multiple jobs, and timing can impact your savings and create tax issues.
A 401k is a workplace retirement savings plan that allows employees to invest a portion of their paycheck, often with an employer contribution. Whether these contributions automatically stop once the annual legal limit is reached depends on your employment situation. For most employees with a single job, modern payroll systems are designed to handle this automatically, but the process requires manual oversight if you change jobs during the year.
Understanding 401k Contribution Limits
The Internal Revenue Service (IRS) sets annual limits on 401k contributions. For 2025, the primary limit, known as the elective deferral limit, is $23,500. This cap applies to the total amount an employee can have deducted from their salary for contribution to either a traditional pre-tax 401k or a Roth 401k.
Employees aged 50 and over can make an additional “catch-up” contribution of $7,500 in 2025. A provision in the SECURE 2.0 Act also created a higher catch-up amount for those aged 60 to 63, effective in 2025. If their plan adopts this option, this group’s catch-up amount is $11,250, which replaces the standard $7,500 catch-up.
A separate, higher limit governs the total amount of contributions from all sources. This includes the employee’s elective deferrals, any employer matching contributions, and other employer-related contributions like profit sharing. For 2025, this overall limit is $70,000, increasing to $77,500 for those eligible for the standard catch-up and $81,250 for those using the higher catch-up.
How Contributions are Monitored and Stopped
For an employee who works for a single employer throughout the year, the process of stopping contributions is typically automated. Most employer payroll systems are programmed with the annual IRS elective deferral limits. Once an employee’s year-to-date contributions reach the maximum, the software automatically halts any further 401k deductions for the rest of the calendar year.
This automated safeguard does not apply across different employers. If you change jobs during the year, the payroll system at the second employer has no information about the 401k contributions made at the first job. Each system only tracks the contributions made under its own plan.
In this scenario, the responsibility falls on the employee to monitor their total contributions. You must keep track of the year-to-date deferrals from your previous employer and inform your new employer’s payroll or HR department when you are approaching the annual limit. You may need to manually request that they stop your contributions to prevent an over-contribution.
Consequences of Exceeding the Limit
Failing to correct an over-contribution to a 401k, referred to as an excess deferral, results in double taxation. The excess amount is first taxed in the year it was improperly contributed because it exceeds the tax-deductible limit. You will pay income tax on that money as part of your regular earnings for that year.
The financial penalty is compounded when you eventually withdraw funds from your retirement account. Because the excess contribution was not corrected and returned to you, the IRS considers it part of the account’s pre-tax basis. When you take a distribution in retirement, that same excess amount will be taxed again as ordinary income, meaning you pay taxes on the same dollars twice.
Correcting an Over-Contribution
If you realize you have contributed more than the IRS elective deferral limit, you must notify your plan administrator about the amount of the excess deferral. This notification should be made as soon as the error is discovered, and the administrator will guide you through their specific procedures.
After notification, you must formally request a “corrective distribution” to have the excess funds, plus any investment earnings, returned to you. The deadline to complete this process and avoid the double-taxation penalty is April 15th of the year following the year of the over-contribution.
The tax treatment of the returned funds has two parts. The principal amount of the excess contribution is considered taxable income for the year in which you made the over-contribution. Any earnings distributed with it are taxable as income in the year they are paid out to you. You will receive a Form 1099-R from the plan administrator detailing the distribution for tax reporting.
Impact on Employer Match Contributions
The practice of “front-loading” contributions can impact your employer’s matching funds. Front-loading occurs when an employee contributes aggressively early in the year, reaching the annual IRS limit well before the final pay period. This can be a problem if your employer’s plan calculates its match on a per-pay-period basis.
Many employers calculate their matching contribution each payday. For example, a company might match 50% of the first 6% of an employee’s salary. If you hit the annual contribution limit in September, your contributions will stop for the rest of the year. Consequently, the company will also stop making matching contributions for the remaining pay periods, causing you to miss out on the full potential match.
Some plans have a “true-up” provision to prevent this loss of matching funds. A plan with this feature performs a year-end calculation to determine the total match you were eligible for based on your annual salary. If the matches you received were less than this total, the company makes a lump-sum contribution to your account to make up the difference. Check your plan documents or ask your HR department if your plan includes this feature.