Contribution Limits for a 401k

The federal tax code imposes limitations on the amounts that an individual can contribute to his 401k during a calendar year. Participant contributions are called elective deferrals as the participant may choose the amount that is taken pre-tax from their paychecks. As of 2011, participants may defer up to $16,500. This amount is increased from time to time to reflect cost of living increases. However, your employer's 401k plan may provide for a lower deferral limit than the limit set by federal law. Your plan may also permit catch-up contributions, which allow participants who are age 50 or older to make additional contributions. For 2011, catch-up contributions allow eligible individuals to contribute an additional $5,500 a year. Refer to your plan document to find out what are the limits of the plan in which you participate.

How Contributions Are Counted

The limit imposed by the federal tax code is an aggregate limit. Accordingly, if you participate in more than one plan, you may not contribute up to $16,500 for each of those plans. You may only contribute $16,500 total for all plans in which you participate. However, if you are age 50 or older and you participate in multiple 401k plans, you may contribute up to the limit plus the catch-up contribution, even if neither plan provides for catch-up contributions.

Return of Excess Contributions

If you exceed the contribution amounts during a calendar year, you must have those excess contributions returned to you before April 15 to avoid a penalty. You also are required to include any income earned on that excess contribution in your gross income. You must include the excess contributions and the related income earned on that amount in your gross income for that taxable year that ended on the prior December 31. Though you are receiving money back from your 401k presumably before you have reached retirement age, you will not be penalized for the early distribution.

Penalty for Excess Contributions

If you do not have your excess contributions returned to you by April 15, the excess contributions will not be included in your cost basis for the 401k account in figuring the taxable amount of any distributions made from the plan in the future. This means that the excess contributions will be taxed twice: when contributed and again when distributed. There could also be serious consequences for a 401k plan to allow the excess contribution to remain in the account as it jeopardizes the plan's qualified status with the Internal Revenue Service.