Excess Annual Additions Need a Different Correction From Excess Salary Deferrals

Section 415 counts more than the payroll election

A defined contribution plan's annual-additions limit generally includes employer contributions, employee elective deferrals, employee after-tax contributions, and relevant forfeiture allocations, subject to applicable exclusions such as qualifying catch-up contributions. An owner can remain below the personal salary-deferral limit and still exceed this broader limit. The annual-additions ceiling also generally includes a compensation-based limit. An owner should therefore reconcile all contribution sources before approving a large year-end employer deposit or voluntary after-tax allocation. Correction under section 415 is not automatically the same as a section 402(g) excess-deferral refund or an ADP testing distribution. The administrator must identify the excess and apply the supported correction method to the actual contribution sources. A withdrawal labeled refund does not by itself repair the plan's qualification failure.

Add all sources before measuring the excess

Assume a hypothetical applicable annual-additions ceiling of $70,000 for an owner whose relevant compensation supports that amount. The account receives $24,000 of elective deferrals, $40,000 of employer contributions, and $10,000 of voluntary after-tax employee contributions, with no catch-up exclusion or other adjustment. Total additions are $74,000, producing a $4,000 excess under these assumptions. The elective deferrals alone are not the problem in this example. If the owner had only $60,000 of relevant compensation, a compensation-based limit could create a larger excess even with the same hypothetical dollar ceiling. These numbers are illustrative and not the current legal limits. Apply the actual limitation year, compensation definition, related-plan aggregation, catch-up rules, and source treatment before determining correction. Separate plans under related employers can require coordinated limits rather than independent maximums.

Reconcile payroll and the recordkeeper by source

Obtain contribution confirmations for elective pretax, Roth elective, catch-up, employee after-tax, matching, nonelective, profit-sharing, and forfeiture sources. Match them to payroll and employer authorizations. Identify the limitation year, which may not simply be the owner's personal calendar-year deferral period. Review controlled employers and plans that must be aggregated. A contribution made after year-end can count for an earlier limitation period depending on the applicable rules, so bank date alone is not sufficient. Confirm the compensation used for the limit and distinguish it from compensation used for the allocation formula. An owner bonus omitted from one system or a profit-sharing deposit allocated to the wrong source can distort the calculation. Preserve the final annual-additions report and the input data rather than relying only on the account's total year-end value.

Apply the permitted correction to the right dollars

The IRS correction guidance describes different treatment depending on employee after-tax contributions, elective deferrals, associated matching, and employer amounts. Some corrections involve distributions with earnings; other employer amounts may be moved to an appropriate suspense treatment under the permitted method. Do not return every excess dollar to the founder as though all contributions were personal salary deductions. Determine the available correction program and reporting with the administrator, including tax forms and treatment of distributed earnings. A correction may also affect nondiscrimination testing or deduction calculations. Retain the source-by-source calculation and evidence of the actual corrective transaction. If the excess arose from a provider setting, review every affected participant and year. Fixing only the owner's account can leave the same formula producing excesses elsewhere in the plan.

Authorize employer funding from remaining capacity

Before each discretionary employer deposit, calculate remaining annual-additions capacity after expected employee contributions and required employer amounts. Update the projection for bonuses, catch-up status, forfeitures, and related-plan allocations. An owner seeking Roth funding through voluntary after-tax contributions should use the same annual-additions schedule rather than treating that source as unlimited. The useful outcome is a supported correction with matching source accounting and a preventive funding control. It should not be presented as another April excess-deferral exercise without analyzing the broader limit. Keeping personal deferral, annual-additions, deduction, and testing limits separately visible lets the owner understand why a contribution can satisfy one ceiling while violating another and avoids repeating the error through an otherwise legitimate retirement funding plan.

Document which source the correction removes and how the administrator treated earnings. Keeping those details allows the return preparer to distinguish an employee refund from employer suspense amounts and prevents an unrelated payroll adjustment from being mistaken for completion.