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The current 401k contribution limit is $18,000. If I'm trying to contribute the maximum amount for the year and accidently go over, what happens? For example, if I end up contributing $20,000 for 2016 do I get a reimbursement of $2000 that's taxed at my income rate? Does the IRS enact any kind of penalty tax for exceeding the yearly limit?

EDIT: To summarize how contributing too much is possible - my current employer offers opportunities for bonuses. I've calculated out a flat rate to deduct from each paycheck that will max out my contribution when combined with the employer match. However, if I qualify for a bonus it's treated as another paycheck instead of being added to the current pay period. My 401k contribution is then deducted from both my regular paycheck and the bonus check. (Normal taxes would also apply to the bonus). And just for clarification, all deductions are pretax. This is a traditional 401k, not a roth.

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    Under what circumstances would your employer allow you to contribute more than the max?
    – Ben Miller
    Feb 2, 2016 at 18:37
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    @BenMiller What if you have multiple employers?
    – Craig W
    Feb 2, 2016 at 19:17
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    Has this already happened, or just something you are worried about? I would hope that your employer has a system in place to prevent an over contribution, as the employer can get in trouble for this.
    – Ben Miller
    Feb 2, 2016 at 23:06
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    The employer will not deduct more than the annual limit, whatever your election is. So I don't think in your situation you should be worried. Keep in mind that match is on top of the 18K limit.
    – littleadv
    Feb 3, 2016 at 3:27
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    They shouldn't be taking the 401k out of the bonus checks in the first place.
    – Loren Pechtel
    Feb 3, 2016 at 22:25

4 Answers 4

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Yes, the penalty is the tax you pay on it again when you withdraw the money. The withdrawal of the excess contribution is taxed as your wages (but no penalty). Excess contribution cannot be added to the basis or considered "after-tax" (hence the double taxation).

Note that allowing you to keep the excess contribution in the plan may lead to disqualifying the plan, so it is likely that the plan administrator will force you to remove the excess contribution if they become aware of it. Otherwise you may end up forcing early 401(k) withdrawal on all of your co-workers.

More on this IRS web page. And this one.

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  • Just a clarification, he's only taxed once. It's a traditional 401k deferral so it's not taxed when it goes in. If he over-contributes for the plan year then he will get refunded his contributions that are over the limit plus any allocable earnings and taxed on that amount. Excess deferrals are taxed in the year deferred, earnings are taxed in the year distributed. IF the correction is not made until after April 15th then there is an additional 10% penalty for early distributions.
    – Chris
    Feb 3, 2016 at 17:11
  • @Chris no, you misunderstood. If he gets a refund then there's no excess contribution. If there's no refund, he contributed 18K+X - the X is not pre-tax. There's no penalty for correcting the excess contribution, but it is taxed twice.
    – littleadv
    Feb 3, 2016 at 19:14
  • No, the X is pre-tax. In his question he says, "all deductions are pre-tax." He's not making after-tax contributions here. He elected to defer a % of his pay as traditional (pre-tax) 401k contributions. He's over contributed because he figured out the % he needs to defer based on his salary to fund to the 18k. He didn't figure in a bonus, which causes the extra contributions. It is only taxed once, and there is no penalty as long as the refund is made prior to April 15th (April 18th this year).
    – Chris
    Feb 3, 2016 at 19:48
  • @Chris it is pretax on the payslip, yes. But you need to remember that the withholding is not the actual tax. On the 1040 it should be added back into the taxable income. Remember that it will be reported by the employer (W2 box 12 code D), so the IRS will know, and they will audit if you don't adjust it accordingly.
    – littleadv
    Feb 4, 2016 at 4:20
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    Ok, I went back and read the IRS page you linked and yes, it is taxed twice, but only if the correction is not made before April 15th. If it is made prior to April 15th then it is only taxed once.
    – Chris
    Feb 4, 2016 at 14:00
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Some companies allow you to make a post-tax contribution to the 401K. This is not a Roth contribution. This can be money beyond the 18,000 or 24,000 401k limit.

The best news is that eventually that money can be rolled into 1 Roth-IRA.

Not all companies allow this option. One company I worked for did this automatically when you hit the annual max. Of course that was made more complex if you had multiple employers that year.

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Scenario: Ken contributes $20,000 in 2015 when the 402(g) limit is $18,000. Ken is not old enough to make catch-up contributions.

Ken made $2,000 in excess deferrals which the plan must correct by refunding the excess and any allocable earnings.

If the correction is made prior to April 15th, 2016: No penalty. The excess + earnings is refunded to Ken and basically becomes income. Ken will receive 2 1099-R's one for the excess deferral in 2015, and one for the allocable earnings in 2016. The refund is taxed at Ken's income tax rate.

If the correction is made after April 15th, 2016: Double taxation! The excess contribution is taxable in 2015, and again in the year it is distributed. Allocable earnings are taxed in the year distributed. The excess + allocable earnings may also be subject to 10% early withdrawal penalty.

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typically, your employer will automatically stop making contributions once you hit the 18k$ limit.

it is worth noting that employer contributions (e.g. "matching") do not count towards the 18k$ employee pre-tax contribution limit.

however, if you have 2 employers during the year their combined payroll deductions might exceed the limit if you do not inform your later employer of the contributions you made at your former employer (or they ignore the info). in which case, you must request a refund of "excess contributions" from one of the plans (your choice). you must report the refund as taxable income on your taxes. if you do not make this request by the time you file your taxes, the tax man will reject your filing and "adjust" your return with more taxes and penalties. sometimes requesting a refund of excess contributions might cause your employer to remove "matching" funds, but i am not clear on the rules behind that.

there are some 401k plans that allow "supplemental after-tax contributions" up to the combined employee/employer limit (53k$ in 2015 and 2016). it is a rare feature, and if your company offers it, you probably already know. however, generally it is governed by a separate contribution election that only take effect once you hit the employee pre-tax contribution limit (18k$ in 2015 and 2016). you could ask your hr department to be sure.

401k plans can be changed if there is enough employee demand for a rule change. especially in a small company, simply asking for them to allow dollar based contributions instead of percent based contributions can cause them to change the plan to allow it. similarly, you could request they allow "supplemental after-tax contributions", but that might be a harder change to get.

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