Act Quickly to Avoid Double Taxation on Excess 401(k) Deferrals
If you made excess deferrals to your 401(k) or 403(b) plan(s) in 2025, you need to correct the error while there’s still time. The deadline is April 15, 2026. If you don’t act before then, you’ll be double-taxed on the excess deferrals.
The maximum pre-tax and Roth-elective deferrals you could make for 2025 were $23,500 (plus another $7,500 if you were at least age 50, or another $11,250 if you were age 60-63 at year-end). However, contributions you make to ALL plans during the year are normally combined when applying that limit. (That aggregation rule doesn’t apply if one of your plans is a 457(b) plan.)
You should have no problem if you were in only one plan during 2025. Your plan should have automatically blocked you from exceeding the deferral limit. Even if that didn’t happen, the plan is responsible for fixing the problem.
But you may have a problem if you were in two different plans during the year because you had two jobs at the same time or changed jobs. Since one plan could not be expected to know how much you contributed to the other plan, the burden is on you to keep track of your combined deferrals. Your 2025 Form W-2 from each employer shows the amount of pre-tax and Roth deferrals in Box 12. Or, you can check your plan account statements.
If you’ve overcontributed, IMMEDIATELY contact the administrator of one of the plans and make them aware of the problem. To avoid double taxation (see below), the administrator must correct the error by April 15, 2026.
How is the error corrected? The plan will make a “corrective distribution” to you. A corrective distribution is the excess over the 2025 limit, adjusted for earnings or losses attributable to the excess. The excess deferrals must be added to your 2025 taxable income. (You’ll need to amend your 2025 tax return if you’ve already filed it.) Earnings on the excess are taxable to you in 2026. In early 2027, you’ll receive two 1099-Rs – for the excess deferrals (which you already reported as 2025 taxable income) and the second for earnings (which you’ll need to report as 2026 income).
Example: Ebony, age 49, made $16,000 of 2025 pre-tax deferrals to Alpha Inc.’s 401(k) plan before leaving to work for Beta Inc. in July 2025. Ebony didn’t keep track of her total 2025 deferrals and made another $15,500 of pre-tax deferrals to Beta’s 401(k) – for a total 2025 contribution of $31,500. She exceeded her 2025 deferral limit by $8,000 ($31,500 – $23,500). The excess deferrals earned $1,000. Ebony became aware of this problem in early 2026 and contacted Beta. On March 31, 2026, Beta’s 401(k) made a corrective distribution of $9,000 ($8,000 + $1,000) to her. Ebony must add the $8,000 excess deferral to the 2025 taxable income that she reports on her 2025 tax return. She will add the $1,000 of earnings to her 2026 taxable income when she files her 2026 tax return.
Why is it so important to have this fixed by April 15? If the error isn’t corrected by that date, you’ll be hit with double taxation. The excess deferrals won’t be paid to you, but they’ll still count as 2025 taxable income. Meanwhile, the excess amount, along with related earnings, will be taxable to you a second time in the year they are eventually distributed to you.
By Ian Berger, JD
IRA Analyst
Ed Slott and Company, LLC
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