Consequences to a Participant Who Makes Excess Annual Salary Deferrals

IRC Section 402(g) limits the amount of retirement plan elective deferrals you may exclude from taxable income in your taxable year, which is generally the calendar year. Your 402(g) limit for 2019 is $19,000.

The 402(g) limit applies to elective deferrals made by you to various plans, including:

  • 401(k) plans,
  • 403(b) arrangements,
  • Salary Reduction Simplified Employee Pension Plans (SAR-SEPs), and
  • Savings Incentive Match Plans for Employees (SIMPLE-IRAs).

The 402(g) limit is an individual limit and not a plan limit, so you must aggregate all elective deferrals contributed to all the plans in which you participate during the taxable year. For example, if you work for two different employers in 2019 that each have a 401(k) plan, you can only defer $19,000 in total - not $19,000 to each plan.

Deferrals more than the annual 402(g) limit are called “excess deferrals.”  If excess deferrals are not corrected timely, the excess deferrals (including earnings on the excess during the taxable year) will be taxable income to you.

Correcting excess deferrals

The excess deferrals can be correcting by distributing the excess (including earnings) by the due date of your tax return. 

Consequences if excess is not corrected

If the excess is not timely distributed, it is:

  1. included in your taxable income for the year contributed, and
  2. taxed a second time when the deferrals are ultimately distributed from the plan.

The excess deferrals may not be distributed until a distribution is otherwise permissible under the terms of your plan. Additionally, you do not receive basis in the excess deferrals.

Effect of catch-up contributions

In determining whether you have exceeded the 402(g) limit, you can consider any catch-up contributions that you are eligible to make under IRC Section 414(v). Your catch-up contribution limit for 2019 is $6,000. You are eligible to make a catch-up contribution if your plan provides for catch-up contributions and you are at least 50 years old by the end of the calendar year during which the contribution is made. Your total allowable deferrals including catch-up contributions for 2019 is $25,000.

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