Excess contribution

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. 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

Excess IRA contributions that are not corrected within the deadline are subject to a 6% excise tax for every year the excess remains in the IRA.

Excess 401(k) contributions that re not corrected timely will result in the employer being subject to an 10% excise tax, the employee being taxed twice on the excess amount and  possible disqualification of the 401(k) plan.

The IRA dollar limits are as follows:

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.

Related Articles Tutorial or Other Content

NIA (Net Income Attributable)