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Just a Few Days Left (April 15th) to Fix 2023 Excess 401(K) Deferrals Thumbnail

Just a Few Days Left (April 15th) to Fix 2023 Excess 401(K) Deferrals

If you exceeded the 2023 limit for 401(k) deferrals, time is of the essence to correct the error. If you don’t act quickly, the tax consequences can be serious. For additional help fixing necessary items for tax season, such as excess IRA contributions, click here.

Just a Few Days Left (April 15th) to Fix 2023 Excess 401(K) Deferrals

The maximum amount of pre-tax and Roth contributions you could make for 2023 was $22,500 (plus $7,500 more if you were least age 50). In applying that limit, contributions you make to ALL plans are combined. (There’s an exception if you participate in both a 401(k) plan and 457(b) plan.)

Most plans have internal controls to prevent you from exceeding the deferral limit in that plan. If the plan mistakenly allows you to overcontribute, it’s up to the plan to fix the problem.

But it’s a different matter if you were in two different plans during the year (because you had two jobs at the same time or changed jobs). One plan had no way of knowing how much you contributed to the other plan. So, the burden is on you to keep track. Your W-2 from each employer indicates the amount of pre-tax and Roth contributions in Box 12. Or, you can check your plan account statements.

If you’ve overcontributed, contact the administrator of one of the plans immediately and make them aware of the problem. To avoid double taxation (see below), the error must be fixed by April 15, 2024.

The plan fixes the problem by making  a “corrective distribution” to you. That is the excess amount, adjusted for earnings or losses on the excess. You’ll receive a corrected W-2 that adds back the excess deferrals to your 2023 taxable income. (If you’ve already filed your 2023 tax return, you’ll need to amend it.) Earnings on the excess are taxable to you in 2024.

Example: Kali, age 45, made $15,000 of 2023 pre-tax contributions to Alpha Inc.’s 401(k) plan before leaving Alpha mid-year to work for Beta Inc. Kali didn’t keep track of her total 2023 contributions and made $12,500 of Roth contributions to Beta’s 401(k) – for a total 2023 contribution of $27,500. She exceeded the 2023 deferral limit by $5,000 ($27,500 – $22,500). The excess deferrals earned $800. Kali becomes aware of this problem and contacts the Beta 401(k) administrator. On March 31, 2024, the Beta plan makes a corrective distribution of $5,800 ($5,000 + $800) to her. Beta also sends Kali a corrected 2023 W-2 showing an additional $5,000 of 2023 taxable income. She must include the $800 of earnings as taxable income for 2024.

What if the corrective distribution isn’t paid to you by April 15? You’ll face double trouble. In that case, the excess deferrals won’t be paid to you, but you’ll still have to pay taxes on them as 2023 income. And the excess, along with related earnings, will be taxable to you a second time for the year they are eventually distributed to you.

Need a to-do list to keep you on schedule and completely up-to-date for tax season? Click here!

By Ian Berger, JD
IRA Analyst
Ed Slott and Company, LLC

Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.

Copyright © 2024, Ed Slott and Company, LLC Reprinted from The Slott Report, 04/08/24, with permission. https://irahelp.com/slottreport/just-a-few-days-left-to-fix-2023-excess-401k-deferrals/, Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. 
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment advisor. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.