EXCESS CONTRIBUTION TO 401K FOR 2023

[HMH3]

Hi, I found out that we  over contributed to 401k  $1400 for this current year 2023.  I have stopped the contribution for the rest of the paychecks for 2023.  But how do I fix the excess issue ? The HR and the plan rep asked me to complete the  Corrective Distribution form? The HR person is inexperienced and does not look like he knows what to do in this case.  It is very hard to get a hold of the plan rep.  I need your expertise so I have an idea what i should do or what will happen . Thank you 

[dmertz · Accepted solution]

I'm not sure what you mean by "we" overcontributed.  401(k) contributions are individual contributions.

You must do what the HR rep said.  Obtain the necessary form from the HR rep or the plan administrator, complete the form and submit it as instructed.  Doing this soon enough so that the correction is made before the end of the year will greatly simplify the process when it comes time to prepare your 2023 tax return.  Failure to make the correction will result in double taxation of the $1,400.

Overcontribution should only have been possible if you had more than one employer in 2023 and contributed to multiple 401(k) plans, otherwise the plan should have automatically stopped taking elective deferrals from your paycheck.  Make sure that you are not confusing 401(k) contributions (with a regular elective deferral limit of $22,500 for 2023) with IRA contributions.  A 401(k) is not an IRA.

[HMH3]

Thanks for your  reply.  My company has no measures in place to prevent EE from setting the contribution amount too high or stop more money from going into  the 401(k) once EE has contributed the maximum.  EE is on their own.  I found out the hard way so here I am, asking for help .  I got this form CORRECTIVE DISTRIBUTION REQUEST .   On the form, it has the box EARNINGS  to check  if I want  the plan to calculate Plan Year and applicable GAP -Period earnings for this and all future Corrective Distributions. 

My question is should I check this box?  Hope you or someone knows about this box and can explain for me to understand.  My HR person is unable to help me .  He has no clue like me since it is new to him too !

thank you

[dmertz]

"My company has no measures in place to prevent EE from setting the contribution amount too high or stop more money from going into  the 401(k) once EE has contributed the maximum."  That leaves the plan open to potential disqualification by allowing at that single employer contributions in excess of the annual limit. 

https://www.irs.gov/retirement-plans/consequences-to-a-participant-who-makes-excess-deferrals-to-a-4...

The IRS page linked above describes the "gap period" as the period "between the close of calendar year in which the excess contribution was made and the time of the corrective distribution."  If you obtain the corrective distribution by the end of 2023, it seems that there would be no gap period.  Still, if the box is labeled simply "EARNINGS" and not "EARNINS DURING THE GAP PERIOD", that leaves it open the question as to whether or not the earnings in 2023 would be distributed as required by the tax code when the corrective distribution is made (in which case it would probably not qualify as a proper corrective distribution).  (I can't imagine that the plan would not include in the corrective distribution the attributable earnings that happened during the taxable year since failing to include those earnings would likely again open the plan up to possible disqualification.)

[HMH3]

Thanks again for the reply and the link.  Appreciate it. 

Next to the box: EARNINGS, it states "Check here if you want us to calculate Plan Year and applicable GAP_Period earnings for this and all future Corrective Distributions".  

I assume I would get the refund by 12/31/2023. If I am not misunderstanding, sounds like I don't have to check this box .  They will calculate the earning for 2013 automatically.    But to be safe, should I check this box  just in case , I dont get the refund by 12/31/2023?

thank you

[dmertz]

You need form them to calculate the plan-year earnings, so it seems that means "Check here if you want us to calculate Plan Year and applicable GAP_Period earnings for this and all future Corrective Distributions" that you need to mark the box.  I read it as your instruction to have them calculate both or neither.  Since the distribution should happen before the gap period, marking the box would result in this case having them calculate just plan-year earnings attributable to the excess contribution, which needs to happen.

[HMH3]

yea, I should check the box.  I understand now.  I was so nervous since I  never experienced something like this before. I feel better now.   

Thanks so much for taking the time to help me.  Greatly appreciate it.