401(k) Rescue, the Ekon Benefits 401(k) Fix-It Series, describes the most common 401(k) mistakes as determined by the IRS. We provide explanations of common mistakes, suggested prevention techniques and recommendations on correction methods.

Common Mistake #7: Participant Deferrals Exceeded the Limit for the Year

According to Internal Revenue Code Section 401(a)(30), to maintain qualified status, 401(k) plans must ensure that participant deferrals across all plans of the same employer do not exceed the limits outlined in Section 402(g).

For the most current limits, visit our Contribution Limits page.

How to Avoid Excess Deferrals

1. Track Contributions Across All Plans:
   Ensure contributions from all plans a participant participates in are within the annual deferral limits.
2. Correcting Excess Deferrals:
   If a participant exceeds the deferral limit, the excess deferral amount, along with attributable earnings, must be distributed to the participant before April 15th of the following year.
   • Taxation: The excess deferral is taxable in the year contributed, regardless of when it is returned. If the excess is not distributed by April 15, it may also be taxable again when eventually distributed. Earnings on the excess are taxable in the year distributed.
   • Avoiding Penalties: If corrections are made by the April 15th deadline, the 10% early distribution tax, 20% withholding, and spousal consent requirements are waived.

Consequences of Failing to Correct Excess Deferrals

If excess deferrals are not corrected by the April 15th deadline:

• The affected participant may face double taxation – once in the year of deferral and again when the excess is ultimately distributed.
• The excess amount becomes ineligible for favorable tax treatment, and associated plans may be treated as failing to meet the requirements of a qualified plan under IRC §401(a).
• A formal correction may be required under the Employee Plans Compliance Resolution System (EPCRS) to preserve the plan’s qualified status.
• Failure to act could jeopardize the plan’s tax-qualified status, particularly if excess deferrals are systemic or uncorrected across multiple participants.

For a complete listing of the most common 401(k) mistakes, please visit the IRS 401(k) Plan Fix-It Guide. For assistance in correcting a plan error, please contact Ekon Benefits at (314)367.6555 or info@ekonbenefits.com.