A:

If you overcontributed (made excess deferral contributions) to your 401(k) plan account, you should notify your employer or the plan administrator immediately. Ideally, this notification should be provided by March 1 of the year following the year the excess deferral occurred. This means that if the excess deferral occurred in 2007, the notification should be provided by March 1, 2008. The excess deferral amount should be returned to you by April 15 (for example, if the excess deferral occurred in 2007, it should be corrected - that is, removed from the account - by April 15, 2008). Excess deferral amounts returned to you should include earnings accrued on the excess amount while it was in your 401(k) plan account. You are required to add the earnings to your taxable income for the year the excess amount is distributed from your 401(k) plan account. In addition, if the excess amount was deferred on a pre-tax basis, your employer must amend your W-2 to show the returned amount as wages.

For example, assume your excess deferral occurred in 2007 and you provided timely notification to your plan administrator. If your contributions were made on a pre-tax basis, your employer must amend your W-2 for 2007 to show the excess deferral amount as taxable wages (in box 1).

If the excess contribution is returned to you in 2007, any earnings included in the amount returned to you should be added to your taxable income on your tax return for 2007.

If the excess contribution is returned to you in 2008, any earnings included in the amount returned to you should be added to your taxable income on your tax return for 2008.

If the excess amount is not returned to you by April 15, you could pay taxes on the amount twice - in the year the excess occurred and in the year it is returned to you - in addition, you will be taxed on the earnings in the year the excess is returned to you.


To learn more, visit Introductory Tour Through Retirement Plans and Introducing The Roth 401(k).

This question was answered by Denise Appleby
(
Contact Denise)

RELATED FAQS
  1. My husband has become eligible for a 401(k) plan (with no matching contribution) ...

    Your husband's employer should check the retirement plan box on line 13 of the 2005 Form W-2 only if your husband elects ... Read Answer >>
  2. Will getting a student loan deferral hurt my credit score?

    You may not be able to afford to pay your student loans, but the long-term consequence to your credit score be disastrous. Read Answer >>
Related Articles
  1. Retirement

    3 Reasons To Use An Employer-Sponsored Retirement Plan

    If you aren't participating in your employer-sponsored retirement plan, you're missing out! Learn the benefits.
  2. Retirement

    How To Correct Ineligible (Excess) IRA Contributions

    Eager to save for retirement? Learn how to avoid overpayment penalties.
  3. Investing

    What are Excess Returns?

    Excess returns are investment returns that exceed a benchmark or index with similar risk.
  4. Retirement

    6 Problems With 401k Plans

    If you pay attention to the problems here, you will be able to avoid the negative effects and meet your retirement goals.
  5. Retirement

    How Yearly Taxes on 401(k) Accounts Work

    Learn how your contributions to traditional or Roth 401(k) accounts are taxed, either in the year of contributions or at withdrawal, depending on the type.
  6. Retirement

    Common Questions About Retirement Plans

    We offer some solutions for the individual taxpayer as well as the small business owner.
  7. Retirement

    Top 10 Mistakes to Avoid on Your 401(k)

    Funding and managing your 401(k) is critical to a financially healthy retirement. Avoid these top 10 mistakes.
RELATED TERMS
  1. Excess Cash Flow

    A term used to describe the income derived from mortgages or ...
  2. Excess Profits Tax

    A special tax that is assessed upon income beyond a specified ...
  3. Excess Reserves

    Capital reserves held by a bank or financial institution in excess ...
  4. Overcontribution

    Any contribution to a tax-deductible retirement savings plan ...
  5. Excess Crude Account

    A Nigerian government account used to save oil revenues above ...
  6. Excess Margin Deposit

    Funds deposited in a trading account beyond what is required ...
Hot Definitions
  1. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  2. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  3. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  4. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
  5. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities ...
  6. Wash-Sale Rule

    An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security ...
Trading Center