Tax Facts

3811 / What are excess aggregate contributions and how can a 401(k) plan that has failed its nondiscrimination testing use them to correct the failure?



Excess aggregate contributions are the excess of the aggregate amount of employee contributions and employer matching contributions (including any QNECs or elective deferrals treated as matching contributions) made on behalf of highly compensated employees over the maximum amount permitted under the ACP test ( Q 3804).1 Distributions or forfeitures of excess aggregate contributions must be made to highly compensated employees under a process identified in regulations.2

A plan will not be disqualified for a failed ACP test for any plan year if, within the 12 month period following the close of that plan year, the excess aggregate contributions (including any income thereon) are distributed (or forfeited) by the plan.3

Any corrective distribution of less than the entire amount of the excess aggregate contributions is treated as a pro rata distribution of excess aggregate contributions and income.4 No early (premature) distribution penalty tax is imposed on the distribution.5 Corrective distributions may be made without regard to the spousal consent rules ( Q 3882).6 Furthermore, corrective distributions may not be considered for purposes of satisfying the required minimum distribution rules ( Q 3891 to Q 3909).7

If the total amount of excess aggregate contributions (and income) is not distributed within the 12 month period following the close of the plan year, the plan will be treated as having an operational failure and will need to be corrected under EPCRS to retain its tax qualification.8

A penalty will be imposed on the employer unless the excess is distributed within 2½ months after the end of the plan year. The employer will be subject to a 10 percent excise tax.9 For plan years beginning after 2007, a plan that satisfies the definition of any automatic contribution feature ( Q 3762) is permitted an extended time period for distributing refunds of excess contributions. The extension for making the correction is from 2½ months to
six months.10

Distributions of excess aggregate contributions (and income) are treated as received by the recipient in the taxable year of the employee ending with or within the plan year for which the original contribution was made. If the total excess amount, including any excess contributions to a 401(k) plan as discussed above, that is distributed to the recipient under the plan for the plan year is less than $100, it is includable in the taxable year distributed.11 Amounts distributed more than 2½ months after the plan year are includable in gross income for the taxable year of the employee in which distributed.12

Instead of distributing excess aggregate contributions, an employer may, to the extent permitted by the terms of the plan, correct the excess by making additional QNECs that, when combined ( Q 3804) with employee contributions and matching contributions, satisfy the ACP test. Excess aggregate contributions may not be corrected by forfeiting vested matching contributions, by recharacterization, by failing to make matching contributions required under the plan, by refusing to allocate the excess aggregate contributions, or by holding contributions in a suspense account for allocation in future years.13

In the case of a plan that includes a cash or deferred arrangement, the determination of excess aggregate contributions is made after determining excess deferrals ( Q 3760) and excess contributions to the cash or deferred arrangement ( Q 3802).14





1.  IRC § 401(m)(6)(B); Treas. Reg. § 1.401(m)-5.

2.  IRC § 401(m)(6)(C). For an example of this allocation, see Treas. Reg. § 1.401(m)-2(b)(3)(ii). See also Rev. Proc. 2013-12, Appendix B.

3.  IRC § 401(m)(6); Treas. Reg. § 1.401(m)-2(b)(1).

4.  Treas. Reg. § 1.401(m)-2(b)(3)(iv).

5.  Treas. Reg. § 1.401(m)-2(b)(2)(vi).

6.  Treas. Reg. § 1.401(m)-2(b)(3)(i).

7.  Treas. Reg. § 1.401(m)-2(b)(3)(iii).

8.  Treas. Reg. § 1.401(m)-2(b)(4)(ii).

9.  IRC § 4979; Treas. Reg. § 1.401(m)-2(b)(4)(i).

10.  IRC §§ 401(k)(13), 401(m)(12), 414(w), Treas. Reg. § 1.401(m)-2(b)(4)(iii).

11.  Treas. Reg. § 1.401(m)-2(b)(2)(vi)(B).

12.  Treas. Reg. § 1.401(m)-2(b)(2)(vi)(A).

13.  Treas. Reg. § 1.401(m)-2(b)(1)(iii).

14.  IRC § 401(m)(6)(D).


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