The Internal Revenue Service (IRS) sets annual deferral limits, which caps the amount you can contribute (defer) from your salary to employer-sponsored retirement accounts each year. These limits apply across all your pre-tax or Roth contributions for 401(k) plans, 403(b) plans, Starter 401(k), SARSEP IRA plans, and SIMPLE IRA plans. You can see total contribution limits here.
If you exceed the limits, generally the excess deferrals must be removed from the plans, taking into account any gains or losses incurred. If your employer offers a match, any match as a result of the excess will be forfeited.
What to do if you overcontributed
Your employee contributions were within the same plan
If you overcontribute (defer) in a single plan and that plan is serviced by Guideline, you will be notified of the overage through email and asked to complete a task on your dashboard to request an excess contribution refund. The task will provide more information about the deadline to act. In general, if you do not act or respond to the task, the refund will be processed and a check mailed to your address on record.
You contributed in more than one plan
If you happen to exceed the deferral limit because you are participating in more than one plan and one of those plans is serviced by Guideline, you must report your external contributions no later than March 1 of the year following the year of deferral so we can include those amounts when determining if you have exceeded your employee contribution limit.
If you exceed the deferral limit, we will notify you by email and a task will be added to your dashboard. Unlike an overage in a single plan, there is a deadline to both report the outside contribution and request a refund. You must report the outside contribution by March 1 of the following year and the refund must be completed by your tax return due date.
If the March 1 reporting deadline is missed, the excess contributions cannot be removed from your plan until you are otherwise eligible for a distribution. Because this deadline is specified in the IRS pre-approved plan document used by your plan, Guideline is unable to make an exception when this deadline is missed.
How to complete the excess contribution refund task
Within the Tasks and notification section of your dashboard, you should see a refund task. Click the “Start” button to initiate your excess contribution refund.
You’ll then need to confirm your information, payment options (check or direct deposit), and mailing address.
Does Guideline automatically prevent excess contributions?
To help avoid excess deferrals from occurring, Guideline will adjust your contribution rate as you approach the limit based on the information we have from your payroll provider and/or your employer.
Scenarios that may lead to excess contributions
Even with preventative measures in place, it is still possible for excess deferrals to occur, especially in the following scenarios:
Your pay fluctuates
While Guideline collects your estimated annual salary and other information from payroll, we will not be able to predict changes in your pay. Fluctuations may occur for several reasons, including additional pay for bonuses or commission, a change in hours worked, or adjustments to your salary.
You participate in more than one employer-sponsored retirement plan
The annual deferral limit measures your contributions to all your deferred compensation retirement plans. If you contributed to external accounts (e.g., you work for multiple employers or you changed employers mid-year), it is vital to notify us of all contributions for the year no later than March 1 of the year following the year of deferral.
Reporting external employee contributions (deferrals) will help Guideline ensure you don’t exceed the limit. Your contributions to another 401(k), 403(b), Salary Reduction Simplified Pension Plans (SAR-SEPs), or Savings Incentive Match Plans for Employees (SIMPLE-IRAs) all count toward the limit.
Note: If the March 1 reporting deadline is missed, the excess contributions cannot be removed from your plan until you are otherwise eligible for a distribution. Because this deadline is specified in the IRS pre-approved plan document used by your plan, Guideline is unable to make an exception when this deadline is missed.
How to report external employee contributions
Access the Contribution page from the main menu of your Guideline dashboard. If you have more than one account with Guideline, select the applicable plan for which you need to report external contributions under Contributions.
Within the Projected contributions section, click the link "Report outside employee contributions," then follow the steps.
If you have more than one Guideline account, you do not need to report contributions related to the other Guideline account as long as those accounts are linked. Instead, the system will account for all your internal accounts and trigger a notification if you exceed the deferral limit.
How excess deferral refunds are taxed
If you receive an excess contribution (deferral) refund, the amount returned will be subject to taxation. How and when you are taxed will depend on the timing of the distribution:
If you are refunded the excess in the same year it was deferred (e.g. you exceed the 2024 limit and you receive a refund of the excess in 2024), the excess and any applicable gains will be taxed as regular compensation in the year distributed.
If you are refunded after the end of the year but prior to the IRS tax deadline of April 15, the excess funds will be taxable in the calendar year deferred and earnings on the excess contribution (if applicable) will be taxed the year the refund is distributed.
If the refund is distributed to you after April 15 of the year following the excess deferral, the excess funds will be taxable in the calendar year deferred. In addition, the excess funds and earnings on the excess contribution (if applicable) will be taxed the year the refund is distributed.
Note that if the distribution is not completed by April 15, the distribution may need to wait until you have a distributable event and, therefore, it may be several years after the excess occurred before you can take the excess deferral distribution.
If the excess was made entirely in a plan sponsored by the same or related employers and is not timely detected or distributed, then the distribution may still occur before you have a distributable event. Contact us to discuss your unique scenario.
You will receive a 1099-R for the applicable tax year once the distribution is processed, which you can use to report your excess contributions, gains or losses for income tax purposes in the year of the distribution.
The above information is intended as general information. As always, if you have specific questions about your situation, you should consult your tax advisor.