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February 23, 2009

Excess contribution

Your Guide

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Definition

Contribution in excess of the statutory limit:

  1. For IRAs, contributions are limited to the lesser of 100% of compensation or the dollar limit in effect for the year. Contributions in excess of this amount are excess contributions. Click here for the IRA limits. See NIA for information about removing earnings with excess IRA contributions
  2. For 401(k) plans, excess contributions are those that cause the plan to fail the Actual Deferral Percentage Test
  3. Individuals who make salary deferral contributions to employer sponsored plans are subject to the limit in effect for the year.  For the limits in effect for the year, see Salary Deferral Contributions. Contributions in excess of this limit are excess salary deferral contributions.
  • Excess IRA contributions that are not corrected by the deadline are subject to a 6% excise tax for every year the excess remains in the IRA.
  • Excess 401(k) contributions that are not corrected timely will result in the employer being subject to a 10% excise tax, the employee being taxed twice on the excess amount and  possible disqualification of the 401(k) plan.
  • Excess salary deferral contributions that are not corrected by the deadline are subject to penalties and may be double-taxed. See Excess deferral  for more information.

Referring Cite

IRC § 219(b),  IRC § 401(k), Treas. Reg. § 1.401(k)-1(b)(2)

Additional Helpful Information

  • Excess IRA contributions must be corrected  by the taxpayer’s tax-filing deadline, including extensions. An individual who files his/her tax return or files for an extension by the due date of his/her federal tax return receives an automatic 6-months extension to correct an excess IRA contribution.
  • If an individual timely files his/her return without withdrawing the excess ,  and completes the transaction  no later than 6 months after the due date of his/her tax return, he/she should  file an amended return with “Filed pursuant to section 301.9100-2” written at the top.  The amended return should include the transaction and any related earnings for the tax year. An explanation of the transaction should also be included.
  • If the plan fails the ACP test, corrective steps  include the following:
  • Refunding amounts to HCEs
  • Recharacterizing salary deferral contributions as after-tax contributions
  • Contributing additional amounts for non-highly compensated employees
  • Contributions that cause the plan to fail the Actual Deferral Percentage Test must be corrected within 2 ½ months after the end of the plan year.
  • Ineligible rollover contribution amounts are automatically deemed a regular year IRA contribution during a year in which the IRA holder is eligible to make a contribution. Refer PLR 8952011

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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