How to Report Excess 401(k) Contribution on a Tax Return

Contributing too much to your 401(k) happens more often than you might think, especially when you switch jobs mid-year or hold multiple positions. The good news is that correcting the error and reporting it properly on your tax return is straightforward if you act quickly. This guide will walk you through the exact steps needed to handle an excess 401(k) contribution, ensuring you stay in good standing with the IRS and avoid unnecessary penalties.

First, Why Do Excess 401(k) Contributions Happen?

Understanding the cause of the over-contribution can help you prevent it in the future. The annual elective deferral limit applies to the combined contributions you make to all your 401(k), 403(b), SIMPLE IRA, and SARSEP plans. An excess contribution, also known as an "excess deferral," typically occurs for a few common reasons:

• Switching Employers: Your new employer’s payroll system doesn’t know how much you contributed at your old job. A few months of maxing out contributions at each company can easily put you over the annual limit.
• Multiple Concurrent Jobs: If you work for two or more employers that each offer a 401(k) plan, you are responsible for monitoring your total contributions to ensure they do not exceed the annual limit.
• Payroll Error: Sometimes a simple administrative mix-up in the payroll department can lead to over-contributing.
• Bonus Withholding: A large bonus that has a high 401(k) contribution percentage applied to it can sometimes push an employee over the annual limit unexpectedly near the end of the year.

For 2023, the elective deferral limit for employees under age 50 was $22,500. If you were age 50 or over, you could contribute an additional $7,500 as a catch-up contribution, for a total of $30,000. For 2024, those limits are $23,000 and $7,500 respectively, for a total of $30,500.

Step 1: Identify the Excess Amount and Request a Corrective Distribution

As soon as you realize you've over-contributed, you need to take action. The key to fixing this issue with minimal pain is to act before the tax filing deadline for the contribution year.

Your first step is to contact the plan administrator for one of your 401(k) plans. It doesn’t matter if you request the refund from your old or new employer’s plan. Advise them of the exact dollar amount of the excess contribution. You must ask them for a “corrective distribution of excess deferrals.” It is very important to use this exact phrasing.

You’re not just getting the excess contribution back; you must also withdraw any income or earnings that money generated while it was in your account. The plan administrator will calculate these "net earnings attributable" for you. This corrective distribution must be completed by the tax filing deadline, typically April 15 of the year following the contribution. For a 2023 over-contribution, you would need to request and receive the distribution by April 15, 2024.

Failing to do this in time results in a significant financial penalty: double taxation. You’ll be taxed on the excess funds in the year you contributed them and taxed again in the year you finally withdraw them.

Step 2: Understand How the Distributed Funds Are Taxed

The tax treatment depends entirely on that April 15 deadline. How you report the income from the corrective distribution hinges on when you receive the money.

Scenario 1: You Request and Receive the Corrective Distribution ON TIME (Before April 15)

This is the preferred scenario. The taxation is split across two years, which can feel confusing, but it prevents penalties.

• The Excess Contribution Amount: This portion is considered taxable income in the year the contribution was made. For example, if you over-contributed by $2,000 in 2023 and received a corrective distribution in February 2024, that $2,000 is included as taxable wages on your 2023 federal income tax return. Your employer will issue a corrected Form W-2 (W-2c) or simply reflect this in your original Form W-2 by adding the excess to your Box 1 wages.
• The Earnings on the Excess: This portion is considered taxable income in the year you receive the distribution. Continuing the example, if your $2,000 excess earned $150, that $150 is taxable income in 2024. You will report it on your 2024 tax return the following year. Your plan administrator will send you a Form 1099-R in January of 2025 to report this income.

Scenario 2: You Receive the Corrective Distribution LATE (After April 15)

If you fail to withdraw the excess deferral and its earnings by the tax-filing deadline, the consequences are stiff.

• Double Taxation: The excess contribution is taxed twice. It is taxed in the year it was contributed (e.g., 2023) because it should have been included in your wages. It is then taxed again when it is eventually distributed because it becomes "after-tax basis" in your plan, and when removed, it's treated as a normal distribution, with no special corrective action coding on the 1099-R.

Missing this deadline is costly and completely avoidable by being proactive. Set a reminder in your calendar at the beginning of the year to check your total contributions from the previous year. Most tax professionals recommend reviewing this in January to leave plenty of time to work with plan administrators.

Step 3: How to Report the Excess Contribution on Your Tax Return

Properly reporting the corrective distribution involves understanding the tax forms you’ll receive and knowing where the numbers go on your Form 1040.

Reporting for Timely Corrective Distributions

Let's stick with our example: you deferred $24,500 in 2023 instead of the $22,500 limit ($2,000 excess). You requested and received a corrective distribution of $2,000 plus a $150 earnings in February 2024.

For your 2023 Tax Return (Filed in early 2024):

1. Form W-2: Your employer should issue a Form W-2 where your income in Box 1 already includes the $2,000 excess deferral. The amount in Box 12, coded D (for Elective deferrals to a 401(k)), should only show the maximum allowable contribution ($22,500 in this case), not the total amount you mistakenly contributed. Confirm that Box 1 wages appear higher than they otherwise would by the amount of the excess.

2. Form 1040: You will simply report the wage figure from Box 1 of your W-2 on line 1a of Form 1040. You don’t need to add anything extra on the return itself for the principal amount of the excess contribution because it’s already been included in your wages by your employer.

3. Reporting Attributable Earnings (for the future): Your plan administrator will send you a Form 1099-R for tax year 2024 (you'll receive this in January 2025) for the earnings. The $150 in earnings will be shown in Box 1 (Gross distribution) and Box 2a (Taxable amount). Box 7 of this form will have distribution code ‘8’ – "Excess contributions plus earnings/excess deferrals taxable in the prior year." This code tells the IRS and tax software like TurboTax or Drake that while the distribution happened in 2024, part of the process related to a 2023 event. The key is that the earnings ($150) are reported on your 2024 tax return. Note: Sometimes you might see code 'P', which means "Taxable in the prior year", but code 8 is more common for this specific situation.

When you file your 2024 return, you will enter the information from this Form 1099-R, and the $150 will be added to your total income for 2024.

What about Roth 401(k) Excess Contributions?

Correcting an excess contribution to a Roth 401(k) is a similar process, with one main difference. Since Roth 401(k) contributions are made with after-tax dollars, the corrective distribution of the excess deferral itself is not taxable. That money has already been taxed.

However, the earnings attributable to that excess contribution are still taxable income. Those earnings were generated in a tax-sheltered account and become taxable in the year they are distributed to you. You'll receive a Form 1099-R reflecting these taxable earnings, just as you would with a traditional 401(k).

Final Thoughts

Fixing an excess 401(k) contribution is mostly an administrative task that relies on quick, clear communication with your plan administrator. Identifying the error early and requesting a corrective distribution before the tax deadline ensures you only pay tax on the funds once, treating it as a simple correction of wages in the year of the mistake and reporting the generated earnings in the following year.

While this process covers most situations, client cases can involve complicated variables not covered in a general guide. For tax professionals who need to move past blog posts and get definitive answers for unique situations, Feather AI provides clear, citation-backed answers from IRS publications and the Internal Revenue Code in seconds. This lets you confirm the correct treatment for any client scenario instantly, so you can advise with confidence instead of digging through source documents.