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 2016, the notification should be provided by March 1, 2017. The excess deferral amount should be returned to you by April 15 (for example, if the excess deferral occurred in 2016, it should be corrected – that is, removed from the account – by April 15, 2017). 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 2016 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 2016 to show the excess deferral amount as taxable wages (in box 1).

If the excess contribution is returned to you in 2016, any earnings included in the amount returned to you should be added to your taxable income on your tax return for 2016.

If the excess contribution is returned to you in 2017, any earnings included in the amount returned to you should be added to your taxable income on your tax return for 2017.

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
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