Excess 401(k) Deferrals Across Multiple Employers

An employee who changes jobs during the year may contribute to more than one workplace retirement plan. Each employer sees only its own payroll deductions, but the federal elective-deferral limit generally follows the employee across plans. Without coordination, a worker can defer the maximum at both jobs and exceed the individual limit. The excess may have to be corrected, and the tax result depends on when the plan distributes it.

The limit follows the participant

For 401(k), 403(b), and certain other arrangements, employee elective deferrals generally count toward a shared individual limit for the year. The current annual amount is adjusted under law and should be checked for the relevant year. Employer matching contributions are not generally treated as the employee’s elective deferrals for this limit, though separate plan and annual-addition limits can apply.

A participant with unrelated employers must add deferrals across the plans. The result can also involve a 403(b), SARSEP, or other covered arrangement, so do not limit the review to plans with the same label. A 457(b) plan generally has a separate deferral limit, subject to its own rules and special coordination when the participant has multiple eligible 457 plans.

Why employers may not catch it

Payroll systems usually track only the employee’s contributions to that employer’s plan. An employer may not know how much the employee deferred at a prior or second job. The participant is responsible for monitoring the total and notifying the relevant plan if deferrals exceed the annual limit.

A job change near year-end can make an excess more likely, especially when the new employer automatically enrolls the employee or the employee continues a high percentage of pay. Review the final pay statement from each employer and any plan notices. Include contributions made under separate plan names when the tax law aggregates them.

Corrective distribution deadline

An excess deferral can generally be corrected by asking one of the plans to distribute the excess plus allocable earnings no later than April fifteenth after the calendar year in which the excess occurred, or an earlier deadline specified by the plan. The participant should contact the plan promptly, because it must calculate earnings and process the distribution. Extending the income-tax return does not extend this corrective deadline.

A timely corrective distribution generally causes the excess amount to be included in income for the year of deferral, while earnings are included in income in the year distributed. The corrective distribution generally is not subject to the additional tax on early distributions. Roth deferrals have specific reporting rules, so use the current IRS instructions and plan paperwork.

What happens if the deadline is missed

If the excess remains in the plan beyond the correction period, it can be taxable in the year contributed and again when distributed because the excess does not increase the participant’s tax basis in the plan benefit. The plan may also face qualification consequences if it fails to satisfy the limit. The participant may not be able to withdraw the amount immediately if plan distribution rules do not permit it.

A late distribution can be subject to other tax consequences, including withholding and an additional early-distribution tax depending on the facts and applicable exception. The participant should not assume that a plan’s eventual payout removes the original excess problem. Contact the plan administrator and tax professional as soon as an overage is found.

Earnings and allocation

The corrective amount includes the excess deferral and earnings attributable to it under the plan’s calculation method. Earnings are generally determined without counting a gap-period adjustment in the same way used under older correction rules. The plan may use its recordkeeping system to calculate net income or loss on the excess. The participant should compare the calculation with the distribution confirmation.

If the participant contributed to multiple plans, one plan may distribute the excess even if the excess arose across all plans. The participant should coordinate which plan will process the correction and provide evidence of total contributions. A plan cannot necessarily distribute a corrective amount from an account that has no distributable balance or where plan terms do not permit the requested correction.

How to prevent an excess

When changing jobs, total year-to-date deferrals from the prior employer and reduce the new election accordingly. If the new employer offers a match, the employee may need to balance match capture against the risk of exceeding the annual individual limit. Some employers allow the employee to stop contributions automatically once the individual limit is reached, but the new payroll system may not know prior-year-to-date contributions.

A participant may choose to request a return from the current employer’s plan or another plan that permits correction, but should do so with enough time for processing. Preserve W-2s, payroll records, plan statements, and correspondence. If an employer’s plan made an error, the employer may have separate correction obligations under plan-qualification rules.

Practical checklist

• Add elective deferrals from every relevant employer and plan for the calendar year.
• Separate employee salary deferrals from employer matching or nonelective contributions.
• Check whether any 403(b), SARSEP, or other arrangement shares the limit.
• Ask the plan administrator to correct an excess by the statutory deadline.
• Confirm the correction includes the excess and allocable earnings.
• Report the excess and earnings in the correct tax years.
• If the deadline passed, get advice on income inclusion, distribution eligibility, and plan correction.

The key point is that the employee limit is generally personal across employers. Multiple payroll systems do not create multiple annual limits. Track all deferrals, ask for a timely correction when needed, and retain the records that establish both the excess and its distribution.