This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
If your actual contributions are greater than your MAC, you have an excess contribution. Excess contributions can result in
income tax, additional
taxes, and penalties. The effect of excess contributions depends on the type of excess contribution. This chapter discusses
excess contributions to
your 403(b) account.
Preventing Excess Contributions
To prevent excess contributions, you should figure your MAC at the beginning of each year using a reasonable estimate of compensation.
If, at any
time during the year, your employment status or your compensation changes, you should refigure your MAC using a revised estimate
of compensation.
How Do I Know If I Have Excess Contributions?
At the end of the year or the beginning of the next year, you should refigure your MAC based on your actual compensation and
actual contributions
made to your account.
If the actual contributions to your account are greater than your MAC, you have excess contributions.
What Happens If I Have Excess Contributions?
Certain excess contributions in a 403(b) account can be corrected. The effect of an excess 403(b) contribution will depend
on the type of excess
contribution.
Types of excess contributions.
If, after checking your actual contributions, you determine that you have an excess, the first thing is to identify
the type of excess that you
have. Excess contributions to a 403(b) account are categorized as either an:
An excess annual addition is a contribution that is more than your limit on annual additions. To determine your limit on annual
additions see
chapter 3 (chapter 5 for ministers or church employees).
In the year that your contributions are more than your limit on annual additions, the excess amount will be included in your
income.
Amounts in excess of the limit on annual additions that are due to elective deferrals may be distributed if the excess contributions
were made for
any one of several reasons, including:
-
A reasonable error in determining the amount of elective deferrals that could be made under the limit on annual additions,
or
-
A reasonable error in estimating your compensation.
If your 403(b) account invests in mutual funds, and you exceed your limit on annual additions, you may be subject to a 6%
excise tax on the excess
contribution. The excise tax does not apply to funds in an annuity account or to excess deferrals.
You must pay the excise tax each year in which there are excess contributions in your account. Excess contributions can be
corrected by
contributing less than the applicable limit in later years or by making permissible distributions.
You cannot deduct the excise tax.
Permissible distributions.
A permissible distribution is a distribution that can be made when one of the following events occurs.
-
You reach age 59½.
-
You have a severance from employment.
-
You die.
-
You become disabled.
-
In the case of salary reduction contributions, you encounter financial hardship.
Reporting requirement.
You must file Form 5330 if there has been an excess contribution to a custodial account and that excess has not been
corrected.
An excess elective deferral is the amount that is more than your limit on elective deferrals. To determine your limit on elective
deferrals, see
chapter 4.
Your employer's 403(b) plan may contain language permitting it to distribute excess deferrals. If so, it may require that,
in order to get a
distribution of excess deferrals, you either notify the plan of the amount of excess deferrals or designate a distribution
as an excess deferral. The
plan may require that the notification or designation be in writing and may require that you certify or otherwise establish
that the designated amount
is an excess deferral. A plan is not required to permit distribution of excess deferrals.
Correction of excess deferrals during year.
If you have excess deferrals for a year, a corrective distribution may be made only if both of the following conditions
are satisfied.
-
You or your employer designate the distribution as an excess deferral to the extent you have excess deferrals for the year.
-
The correcting distribution is made after the date on which the excess deferral was made.
Correction of excess deferrals after the year.
If you have excess deferrals for a year, you may receive a corrective distribution of the excess deferral no later
than April 15 of the following
year. The plan can distribute the excess deferral (and any income allocable to the excess) no later than April 15 of the year
following the year the
excess deferral was made.
Tax treatment of excess deferrals (not attributable to Roth contributions).
If the excess deferral is distributed by April 15, it is included in your income in the year contributed and the earnings
on the excess deferral
will be taxed in the year distributed.
Tax treatment of excess deferrals attributable to Roth contributions.
If the excess deferral is distributed by April 15, the income attributable to the excess deferral is taxed in the
year distributed. However, if the
excess deferral is not distributed to you by April 15, then the amount of the excess deferral will be included in your income
for the tax year in
which it is distributed.
Example 1.
William's MAC for 2004 was $13,000. All of William's contributions were made through salary reductions. He contributed $14,000
in 2004, an excess
deferral of $1,000. He notified his plan administrator and his employer of the excess contribution on March 15, 2005, and
the excess deferral was
distributed on April 13, 2005. Because the excess deferral was distributed before April 15, 2005, the excess deferral will
be included in his income
for 2004, and any earnings on the excess is included in his income in the year they are distributed.
If you do not receive a distribution of excess elective deferrals by April 15 of the year following the year it is
contributed, it will be included
in your earned income in the year contributed and in the year distributed.
Example 2.
Assume that, in Example 1, a distribution of the excess deferral was not made to William by April 15, 2005. Because the distribution was
not made timely, the excess deferral will be taxed in 2004 (the year contributed) and again in the year the excess deferral
is distributed. The
earnings on the distribution will be taxed in the year they are distributed.
