The Internal Revenue Service (IRS) sets annual deferral limits, which caps the amount you can contribute 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.
The 2023 deferral limit is set to $22,500 for standard 401(k) plans (increasing to $23,000 in 2024). However, if you are over the age of 50, you are eligible to contribute an additional $7,500 as catch-up contributions. For Starter 401(k) plans, the deferral limit for 2024 (the first year these plans are available) is $6,000, and $1,000 in catch-up contributions for these specific plans.
If you exceed these limits, then you may be eligible to receive a refund of the additional funds, taking into account any gains or losses incurred. Unfortunately, if your employer offers a match, any match as a result of the excess will be forfeited.
Scenarios that may lead to excess contributions
To help avoid excess deferrals from occurring, Guideline may automatically adjust your contribution rate as you approach the limit. To calculate the new rate, we’ll use your estimated base annual salary (as reported by your administrators).
However, even with these preventative measures in place, it is still possible for excess deferrals to occur, especially in the following scenarios:
External contributions
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. Reporting external contributions will help Guideline ensure you don’t exceed the limit.
To report external contributions, click on the Change contribution button from your main Guideline dashboard. 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. Instead, the system will account for all your internal accounts and trigger a notification if you exceed the deferral limit.
Fluctuations in pay
While Guideline collects your estimated annual salary, we will not know how much you actually earn throughout the year. Fluctuations may occur for several reasons, including additional pay for bonuses or commission, a change in hours worked, or adjustments to your salary. Therefore, it’s possible the automatic contribution rate adjustments will not be calculated accordingly.
What to do if you overcontributed
If you happen to exceed the deferral limit in the plan serviced by Guideline, we will notify you by email. You must then complete the excess contribution refund request task on your dashboard by March 1. You'll have an option to receive the refund amount via check or ACH.
If you did not report outside contributions, we will be unable to retroactively calculate and process the refund with new details provided beyond this date. In this case, we recommend that you to reach out to your tax advisor to discuss your scenario and help determine next steps.
How excess contribution refunds are taxed
If you receive an excess contribution 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 2023 limit and you receive a refund of the excess in 2023), 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 12, the distribution may need to wait until you have a distributable event and, therefore, may be several years after the excess occurred. 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.
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.
The above information is intended as general information. As always, if you have specific questions about your situation, you should consult your tax advisor.