It's important to differentiate between what is an overcontribution and what isn't. Catch-up contributions are not overcontributions. Any matching contributions from your employer won't push you above the wage deferral limit either. The IRS allows total contributions from both the employee and the employer to reach a much higher limit than the employee salary deferral. For 2024, that amount is $69,000, or $76,500 for those 50 and older. For 2025, the limits are $70,000, $77,500 for ages 50-59 or 64 and older, and $81,250 for ages 60-63.
What to do if you've overcontributed to your 401(k)
If you find you've overcontributed to your 401(k), contact your employer or plan administrator as soon as possible. Tell them you've made an excess deferral and the amount. It's best if you catch this error before Tax Day (which is April 15 in 2025) in the year following the overcontribution.
Once you've alerted your plan administrator, processing your overcontribution error may take a bit of time. The plan administrator is required to distribute the excess deferral and earnings attributed to those funds by a certain date laid out in the 401(k) plan. Earnings are calculated based on the total change in value of the account since the overcontribution.
It's important that this process be completed before the tax deadline of the year after the overcontribution is made, so you need to check all your W-2s and records as soon as you get them to make sure you have time to correct the error if you overcontributed.
What overcontributions mean for your taxes
If you overcontribute, you might have to pay extra taxes. Once the mistake has been corrected, you'll get some new tax forms from HR.
The first form is an amended W-2. The new W-2 will show an increase in taxable wages equal to the amount of the overcontribution. That's the number you'll need to report to the IRS on your form 1040 for the year of the corrected W-2. If you've already filed taxes for that year, you'll have to file an amended return.
You'll also receive a 1099-R for the distribution of earnings tied to your overcontribution. You'll receive this in January of the year following the year the overcontribution was paid back.
That 1099-R might be a much higher amount (meaning more taxes) if you don't catch and correct the overcontribution error before tax day of the year following the overcontribution. That's because the IRS says that for corrections after that deadline, the overcontribution "is not included in the employee's cost basis in figuring the taxable amount of any eventual benefits or distributions under the plan."
In other words, instead of the 1099-R reflecting just the earnings on the overcontribution, it'll reflect the total distribution, including the initial overcontribution. That means you effectively get taxed twice on that income -- once in the year you earned it and again in the year you corrected the overcontribution.
Another penalty for finding the error late is paying the standard 10% early distribution penalty. This applies to overcontribution distributions corrected after the Tax Day deadline for employees younger than 59 1/2.
