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Retirement Topics - What Happens When an Employee has Elective Deferrals in Excess of the Limits?

If an employee's total deferrals are more than the limit for that year, the employee should notify the plan and ask that the difference (called an excess deferral) be paid out of any of the plans that permit these distributions. The plan must then pay the employee that amount by April 15 of the following year (or an earlier date specified in the plan).

Excess withdrawn by April 15. If the employee withdraws the excess deferral by April 15, the withdrawn amount is not reported again as part of the employee’s gross income for the year. Any income earned on the withdrawal is reported as gross income for the tax year in which it is withdrawn. The distribution is not subject to the additional 10% tax on early distributions.

Excess not withdrawn by April 15. If the employee does not take out the excess deferral by April 15, the excess, though taxable in the year of deferral, is not included in the employee's cost basis in figuring the taxable amount of any eventual benefits or distributions under the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan.

Additional Resources:

Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
Publication 525
, Taxable and Nontaxable Income

Page Last Reviewed or Updated: 31-Jan-2014