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My employer overpaid into my 401k account (ie: deposited an extra paycheck's worth of money into the account). I notified the HR/payroll person of the mistake, and they said they'd "look into it", but no action has been taken.

With the end of the year approaching, thus tax reporting time in the US, I'm concerned about what my liability might be for the extra deposits amounts over what was withheld from my paycheck. Since it's a 401k, I can't just return the money.

Note: my employer does not have a matching or profit sharing program, so it wasn't a planned employer contribution.

Update: I started work at this employer during 2012, so there isn't the possibility of a 2011 contribution being deposited in 2012 calendar year.

The amount is equal to one paycheck's withholding, so 9% of 1/24th annual salary. So not a huge amount, but enough to stick out.

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Since your comment on @JoeTaxpayer's answer says that you are still under the 2012 contribution limits if the extra money is left in your 401k account, I do not think that there is any problem for you if the money is left in the 401k account. As I understand it, your salary is $X for 2012 of which you contribute some percentage per paycheck to your 401k account. Your contributions would have totaled $Y for 2012 if the glitch of extra money being out into your 401k account had not occurred. In the absence of the glitch, your W-2 form would have reported $X as gross wages, $(X-Y) as taxable wages and $Y as 401k contributions. Since an additional $z has been put into your 401k account, but not deducted from your paycheck, your employer could do one of two things.

  • The extra money could be withdrawn from your 401k account by your employer. If this is done, then your W-2 form will be as described above.

  • The extra money is not withdrawn by your employer. Your W-2 form will still report $(X-Y) as taxable wages, but $(Y+z) as the 401k contribution and $(X+z) as gross wages. Since $(Y+z) is less than the maximum 2012 contribution, everything is fine.

In your position, I would very much prefer the latter alternative over the former, not just because there is a larger contribution to the 401k account with no change in tax liability, but also because there is always the possibility that HR/Payroll will screw up the withdrawal of the excess contribution so that it appears as a premature withdrawal by the participant. In this case, the participant not only has to pay income tax on $z but also a 10% excise tax for premature withdrawal, without actually getting even a penny from that $z taken out, which will go right back into the employer's coffers.

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  • The last paragraph is not correct. It doesn't matter how it looks. Worst case, the 401k plan manager will withhold tax amount from the distribution (20%) but since its employers' money - it will be their mess to clean, not the OP's. In any case such a scenario is highly unlikely. For @John, It is worth to keep in mind that you have to verify that whatever of the two options the employer have chosen has in fact been implemented correctly. Have your tax preparer go over the W2 and check that all is right.
    – littleadv
    Dec 18, 2012 at 6:05
  • I think you're on the right track, but if the $z extra deposit is included in the gross pay on my W2, wouldn't I be responsible for FICA taxes on that amount?
    – John M. Wright
    Dec 18, 2012 at 13:38
  • @littleadv There might be 3 different parties involved: the employer, the plan administrator, and the funds custodian, and there are all kinds of glitches possible. When my wife rolled over her Roth 401k into a Roth IRA, the money was rolled over correctly (accepted by new custodian as a Roth IRA) but the 1099 (issued by funds' custodian (Schwab), not the plan administrator) said Rollover of 401k to Traditional IRA. Getting a corrected 1099-R from Schwab, with whom there was no direct relationship, was impossible (plan administrator declined to get involved). Anything might happen here.
    – Dilip Sarwate
    Dec 18, 2012 at 23:59
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"The penalty for excess contributions is 6 percent. The 6 percent is assessed on the amount of the overage. This penalty is an excise tax. If you remove the excess amount prior to the end of the tax year, you will not be assessed a penalty on the excess contribution amount."

Above is from http://beginnersinvest.about.com/od/401k/a/401k-Penalties-To-Avoid.htm

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    The 6% penalty is for amounts over the IRS' contribution limits. In my case, I'll still be under the 2012 contribution limit, even with the addition deposit
    – John M. Wright
    Dec 18, 2012 at 4:10
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If they leave the extra funds in the account the IRS will consider it as employer match. They weren't funds from your paycheck, they were from the employers profits. Because they don't have a formal matching program the extra funds will still keep then under the max match.

There is one other explanation that needs to be considered. If the last paycheck from 2011 was near the end of the year (the last Friday of 2011 was December 30th) the 401K funds from that final paycheck may not have been deposited into your 401K until early January 2012. If you count contributions when looking at your 401K statement it will look like one two many for 2012; but the IRS only cares when it was deducted from your paycheck, not when it was deposited into your account. The Department of Labor only requires they be deposited by the 15th of the following month.

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  • In my case, I changed employers during 2012, so all 401k contributions were during this year - but the last-paycheck-posted-in-next-calendar-year scenario is certainly a possibility for anyone else reading this in the future to consider.
    – John M. Wright
    Dec 18, 2012 at 13:22

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