Multiple 401(K) Plan Contribution Limits
It is not uncommon for individuals to have multiple employers, each with a 401(k) plan. This can possibly create a situation where the employee makes an excess elective deferred compensation contribution. The maximum annual contribution for 2023 is $22,500 ($30,000 if age 50 and over).
The limit does not just apply to each 401(k) plan to which the employee makes elective deferrals, but instead applies to the aggregate amount of all the elective deferrals made by the employee for the year to all plans which permit such contributions, including:
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Code Sec. 401(k) deferred compensation plans
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Code Sec. 408(k) SEP IRAs
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Code Sec. 408(p)(2) SIMPLE Plans, and
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Code Sec. 403(b) annuity plans (TSAs)
However, Code Sec. 457 plans (government plans) are not included in the overall deferral limitations.
Example -Sam is a 45-year-old individual who participates in employer Y's qualified cash or deferred arrangement. For January through July of 2024 Sam deferred $13,800 into Y's qualified cash or deferred arrangement. Sam subsequently leaves employer Y’s employment and begins working for employer Z. During the remainder of 2024, Sam defers an additional $9,500 under Z's qualified cash or deferred arrangement. Sam’s elective deferral contributions for 2024 total $23,300. Since Sam is under age 50, Sam’s maximum allowable contribution for 2024 is $23,000 and he has $300 in excess contributions.
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To the extent taxable, the distribution of the excess deferral is taxable in the year distributed (Reg. Sec. 1.402(g)-1(e)(8)(i)). Thus, an excess deferral for 2023 distributed in 2024 would be taxable in 2024. Such a distribution would appear on a 1099-R for 2024 with a code 8. It is not subject to the early distribution penalty of Sec 72(t).
Correcting Excess Contributions
After the close of the tax year, but not later than April 15 or earlier as specified in the plan, the taxpayer may notify each plan under which elective deferral contributions were received by the plan for the year. The notification must also identify the extent, if any, the contribution consisted of designated Roth contributions (Reg. Sec. 1.402(g)-1(e)(2)(i)). No later than April 15 after the close of the taxable year, the plan may distribute the excess and any earnings associated with the excess contribution to the taxpayer (Reg. Sec. 1.402(g)-1(e)(2)(ii)).
Caution - Here is the result of not correcting an excess 401(k) contribution by April 15 of the subsequent year:
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The excess is taxable in the year of the excess contribution (but not subject to the premature distribution penalty).
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Whenever the excess is withdrawn it is taxable again (i.e., no basis is established by virtue of the excess being taxed).