Excessive Pension Contributions: Penalties, Fixes, and Refunds

Excess retirement contribution penalties come in two main forms: a 6% annual excise tax on excess amounts left in an IRA, and double taxation of excess 401(k) elective deferrals that aren’t returned in time. Both can be avoided by withdrawing the excess plus its earnings before your tax filing deadline. For 2026, the limits that matter are $7,500 for IRAs, $24,500 for 401(k) elective deferrals, and $72,000 for total contributions to a defined contribution plan from all sources.¹

Crossing any one of those ceilings creates an excess, even if you’re safely under the others. The consequences depend on which limit you breached and how fast you act.

What the Penalty Actually Costs You

IRAs: 6% Every Year the Excess Sits There

Contributing more than the allowed amount to a Traditional or Roth IRA triggers a 6% excise tax on the excess under Section 4973.² This isn’t a one-time hit. The 6% applies for every year the excess remains in the account. A $5,000 excess left alone costs $300 annually, compounding into a real drag on the account.

You report and pay the tax on Form 5329, filed with your income tax return. If you aren’t otherwise required to file, you still owe the form on its own by the normal deadline.

Roth IRAs add an income trap. For 2026, Roth contributions phase out between $153,000 and $168,000 of modified adjusted gross income for single filers, and between $242,000 and $252,000 for joint filers. Earn above the top of the range and contribute anyway, and the entire contribution is an excess.

401(k) Excess Deferrals: Taxed Twice If You Miss the Deadline

The sharpest penalty applies when your elective deferrals exceed the 402(g) limit and you don’t fix it in time. The excess is taxed twice: once in the year you contributed it, because those dollars should never have been excluded from your wages, and again when the plan eventually distributes the money.³ Earnings on the excess are taxable in the year distributed.

A timely corrective distribution is specifically exempt from the 10% early withdrawal penalty under Section 402(g)(2)(C).⁴ Miss the deadline and that exemption goes away too.

The 402(g) limit applies per person, not per plan. If you defer at two jobs, your combined deferrals cannot exceed $24,500 (plus catch-up if you qualify). No employer coordinates this for you.

When the Plan Over-Contributes for You

You can end up with an excess without doing anything wrong. Section 415(c) caps total additions to your account — your deferrals, employer match, profit-sharing, and forfeitures combined — at the lesser of $72,000 or 100% of your compensation for 2026.⁵ Catch-up contributions don’t count toward this ceiling.

Highly Compensated Employees can also be blindsided by nondiscrimination testing. If the plan fails the ADP or ACP tests, a portion of HCE contributions is reclassified as excess and returned, even if every individual limit was respected.⁶ For 2026, you’re generally an HCE if you earned more than $160,000 from the employer in the prior year, or owned more than 5% of the business at any point in the current or prior year.⁷

The employer also faces its own 10% excise tax on ADP/ACP excess contributions not distributed within two and a half months after the plan year ends (six months for eligible automatic contribution arrangements).⁸ That tax falls on the company, not you, but it’s why HR moves fast when a test fails.

Plan Disqualification

The extreme outcome is losing the plan’s tax-qualified status. Repeated 415(c) violations or uncorrected testing failures can trigger this. When a plan is disqualified, HCEs must include their entire vested balance in taxable income for the disqualified years, while non-highly-compensated employees generally only include employer contributions from those years.⁹ Disqualification is rare, since the IRS prefers correction, but the threat is what makes the correction rules stick.

Fixing an Excess IRA Contribution

The cleanest fix is to pull the excess plus any earnings it generated before the due date of your tax return, including extensions. Get the money out by that date and no 6% tax applies for the contribution year.¹⁰ The earnings portion is taxable as ordinary income in the year the original contribution was made.

Earnings are calculated using a specific formula in the Treasury regulations: the excess contribution multiplied by the change in the IRA’s value over the relevant period, divided by the adjusted opening balance.¹¹ If the account lost money during that period, net income is negative and you withdraw less than the original excess. Your custodian will usually run this calculation for you if you ask for a return of excess contribution.

If You Miss the Filing Deadline

Two options remain, both worse than a timely withdrawal.

You can still pull the excess principal, but you’ll owe the 6% tax for the contribution year and any earnings stay in the account. Or you can leave the excess where it is and absorb it into next year’s limit. Over-contribute by $1,500 in 2026, and you could treat that amount as part of your 2027 contribution, adding only $6,000 in new money for 2027 (assuming a $7,500 limit). You’ll still owe the 6% for 2026, but the excess stops racking up new penalties once it’s absorbed.

Recharacterization When Roth Income Limits Trip You Up

If your income turns out too high for a Roth contribution, you can recharacterize it as a Traditional IRA contribution. Your trustee moves the contribution plus attributable earnings from the Roth to a Traditional IRA. Complete the transfer by your tax filing deadline (including extensions), and the IRS treats the contribution as if it had gone into the Traditional IRA from the start. No 6% penalty applies.¹²

One boundary worth noting: you can recharacterize a regular Roth IRA contribution, but you cannot recharacterize a Roth conversion. The Tax Cuts and Jobs Act eliminated that option effective January 1, 2018.¹² A conversion you regret is a conversion you keep.

Fixing an Excess 401(k) Deferral

If your total deferrals for the year exceeded the 402(g) limit, notify the plan and request a distribution of the excess. The statute gives you until March 1 following the contribution year to allocate the excess among your plans, and the plan must distribute the excess plus allocable earnings by April 15.⁴ With deferrals at multiple employers, notification is on you. Neither employer sees the other’s payroll.

Meet the April 15 deadline and the excess is taxed in the contribution year while the earnings are taxed in the year of distribution. Miss it, and the excess is taxed in both years: once on your return for the contribution year, and again when the plan eventually pays it out.³ That’s real money to a deadline you could have met.

When the 415(c) Ceiling Is Breached

When total additions exceed the annual additions limit, the plan follows a set correction hierarchy. Excess from employer contributions or forfeitures goes first into an unallocated suspense account and reduces future employer contributions. If excess remains, the plan distributes your elective deferrals, even if those deferrals were individually under the 402(g) limit. After-tax employee contributions come out last.⁵

When Nondiscrimination Testing Forces a Refund

ADP and ACP failures are usually fixed by distributing excess amounts to the HCEs with the highest deferral rates. The plan has 12 months after the close of the plan year to complete these distributions and keep its qualified status. To avoid the employer’s 10% excise tax, distributions must go out within two and a half months of year-end (six months for eligible automatic contribution arrangements).⁶

If the Correction Window Has Already Closed

Once the normal deadlines have passed, plan sponsors can use the IRS Employee Plans Compliance Resolution System (EPCRS) to fix the problem and preserve qualified status.¹³ EPCRS has three tracks:

Self-Correction (SCP): the sponsor corrects on its own, no IRS filing and no user fee. Available for operational failures corrected within two years of the end of the plan year in which the failure occurred, and for certain insignificant failures without a time limit.
Voluntary Correction (VCP): the sponsor files with the IRS and receives a compliance statement. For submissions on or after January 1, 2026, VCP user fees range from $2,000 for plans with assets up to $500,000 to $4,000 for plans with assets over $10 million.¹⁴
Audit Closing Agreement (Audit CAP): used when the IRS finds the failure during an audit. Sanctions are larger than VCP fees, which is the incentive to self-report.

SEP and SIMPLE IRA Excesses

SEP and SIMPLE IRAs are subject to the same 6% excise tax under Section 4973.²

For 2026, employer contributions to a SEP IRA cannot exceed the lesser of 25% of compensation or $72,000.¹⁵ Because only the employer contributes to a SEP, excesses are almost always the employer’s error. The fix is to withdraw the excess or apply it to next year’s contributions.

SIMPLE IRAs allow employee deferrals up to $17,000 for 2026, with catch-up contributions of $4,000 for participants age 50 to 59 and those 64 and older, and $5,250 for the 60-to-63 age group. Employer contributions are generally either a dollar-for-dollar match up to 3% of compensation or a flat 2% nonelective contribution. Blow past either limit and the 6% penalty runs annually until corrected.

The IRS SIMPLE IRA Fix-It Guide directs sponsors to distribute excess contributions or apply the excess to future contribution obligations.¹⁶ SEP and SIMPLE sponsors can also use EPCRS when the standard window has closed, with VCP fees based on the total value of all participants’ account balances.¹⁴

1
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
2
Office of the Law Revision Counsel. 26 USC 4973 – Tax on Excess Contributions to Certain Tax-Favored Accounts and Annuities
3
Internal Revenue Service. 401(k) Plan Fix-It Guide – Elective Deferrals Weren’t Limited to the Amounts Under IRC Section 402(g)
4
Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees’ Trust
5
Internal Revenue Service. Fixing Common Plan Mistakes – Failure to Limit Contributions for a Participant
6
Internal Revenue Service. 401(k) Plan Fix-It Guide – The Plan Failed the 401(k) ADP and ACP Nondiscrimination Tests
7
Internal Revenue Service. IRS Notice 2025-67 – 2026 Limitations Adjusted as Provided in Section 415(d)
8
Office of the Law Revision Counsel. 26 US Code 4979 – Tax on Certain Excess Contributions
9
Internal Revenue Service. Tax Consequences of Plan Disqualification
10
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
11
eCFR. 26 CFR 1.408-11 – Net Income Calculation for Returned or Recharacterized IRA Contributions
12
Internal Revenue Service. Retirement Plans FAQs Regarding IRAs
13
Internal Revenue Service. EPCRS Overview
14
Internal Revenue Service. Voluntary Correction Program (VCP) Fees
15
Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
16
Internal Revenue Service. SIMPLE IRA Plan Fix-It Guide