Excess Elective Deferrals When Making Retirement Contributions

Employees Who Contributed Both to the TSP and to Another Tax-Deferred Retirement Plan During 2023 Need to Beware of Excess Elective Deferrals

This column discusses the Internal Revenue Code (IRC) annual limit on elective deferrals. Elective deferrals include both before-taxed salary traditional TSP and after-taxed salary Roth TSP contributions, made by federal employees who contributed to both the TSP and to another qualified retirement plan during 2023. Those employees who made “excess elective deferrals” during 2023 could be subject to IRS penalties and additional taxes.

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An excess elective deferral is the amount of an employee’s combined contributions to tax-deferred and tax-free retirement plans that exceed the annual limit on elective deferrals (regular contributions), and for employees who are age 50 or older on the last day of the calendar year, additional contributions towards the “catch-up” limit.

During 2023, federal employees younger than age 50 (employees born after December 31, 1973) could contribute a maximum of $22,500 to their traditional TSP, to the Roth TSP, or to a combination of both TSP accounts. Employees aged 50 or older as of December 31, 2023 (employees born before January 1, 1974) could contribute a maximum $30,000 to the traditional TSP, to the Roth TSP, or to a combination of both TSP accounts.

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FERS employees should note that agency automatic contributions (1 percent of a FERS employee’s SF 50 salary) and the agency matching TSP contributions that FERS employees receive from their agencies are not part of elective deferrals and additional contributions toward the catch-up limit.

What Happens if An Employee is Contributing to the TSP and to Another Qualified Retirement During 2023?

An employee can request a refund of excess deferrals from one or more retirement plans that the employee participated in during 2023. Each plan has the option of returning an employee’s excess deferrals, plus any associated earnings by April 15, 2024. The following table summarizes the several types of retirement plans that employees could have participated in during 2024:

Retirement Plan

TSP (traditional and Roth)
401(k) (traditional and Roth)
403(b) (traditional and Roth)
457 (traditional and Roth)
SIMPLE IRA
SARSEP

The following example illustrates:

Jason, age 62, retired from federal service on July 29,2023. During the period January 1,2023 through July 28,2023 when Jason was a federal employee, he contributed the maximum $30,000 to the TSP ($22,500 regular contributions plus $7,500 catch-up contributions). Jason started working for a private company on September 1, 2023. Jason has access to a profit-sharing retirement plan through his private company in which employees who participate in the retirement plan receive company matching contributions of 8 percent. Jason immediately started contributing to the 401(k) plan and continued to do so through the end of December 2023. Jason did not realize that he was ineligible to contribute to the 401(k) plan during 2023 because he had already contributed the maximum $30,000 to the TSP for the year 2023. Jason will therefore have to withdraw his excess elective deferrals – either from the TSP or the private company 401(k) retirement plan. This TSP withdrawal procedure is explained below.

What Happens If Any of the Limits Are Exceeded by Contributing to Both a Civilian and a Uniformed Services Member TSP Account?

There are some federal employees who are also members of the uniformed services Ready Reserve. These employees contribute to the civilian TSP and when they are activated and serve in the Ready Reserve, they are eligible to contribute to their uniformed services TSP account. Each year in January, the TSP will check to see whether a federal employee’s combined contributions made during the preceding calendar year to both accounts (the civilian TSP account and the uniformed services TSP account) exceeded any of the limits- regular contributions and regular contributions plus “catch-up” contributions. To do so, the TSP will add up the traditional TSP and the Roth TSP contributions made to both accounts. Note that the traditional tax-exempt contributions made to a uniformed services member account (while the uniformed service member is deployed to a designated combat zone) do not count toward the elective deferral limit. The TSP will then withdraw any contributions that exceeded the applicable limit, along with attributable earnings on those contributions before April 15. The employee need not take any action to request the return of excess contributions.

Elective deferrals and their associated earnings in a uniformed services TSP account will be returned before those elective deferrals in the civilian TSP account. If a civilian employee/uniformed service member made both traditional TSP and Roth TSP during the year, the excess elective deferrals plus their earnings, are returned to the civilian employee/uniformed service member. This will be done to return amounts in a proportional manner from the traditional TSP and Roth TSP balances.

How the TSP Refund Process Works

A federal employee who made excess elective deferrals to the TSP and to another retirement plan (see table above for other retirement plans) needs to log into his or her TSP MyAccount and complete Form TSP-44 402(g) (Refund Request Form). Form TSP-44 402(g) must be submitted no later than March 15 in order for the TSP to process the employee’s excess deferral refund request by April 15.

What Are the Tax Consequences If an Employee Contributes More to the TSP Than the Annual Limit in Any Calendar Year?

Excess elective deferrals are treated as income in the year in which an employee made the contributions, whether they are or are not refunded to the employee. The total amount of the deferrals (deferred income-salary) is reported in Box 12 of an employee’s Form W2 that the employee receives in January following the year of deferrals.

Employees who contributed to the traditional TSP during calendar year 2023 will see in box 12 (Code “D”) of their 2023 Form W2 the total amount of contributions they made via payroll deduction during calendar year 2023.

Those employees who have made excess deferrals during 2023 because they participated both in the TSP and another retirement plan (such as Jason in the example above) can choose to have the excess deferrals withdrawn from either the TSP or the other retirement plan. If an employee chooses to have the excess deferrals withdrawn from the TSP as a refund (via Form TSP-44 402(g)), then the employee will receive IRS Form 1099-R which will indicate the amount of the excess that was refunded to the employee.

Employees who have made excess deferrals to the traditional TSP and who request a refund of those excess deferrals must report the total amount of the excess on the employee’s federal income tax return that year as taxable wages for that year. Roth excess deferrals are also taxable wages for the year in which excess deferrals are made. However, the amount to be reported as excess deferrals when it comes to the Roth TSP is already reported as income on the employee’s W2 statement, Box 1 (Taxable Wages).

How are Earnings on Excess Elective Deferrals Treated for Tax Purposes?

Associated earnings distributed with excess elective deferrals are considered taxable income in the year in which the earnings are distributed. This is unlike the excess electives deferrals which are considered taxable income in the year they are contributed. Those employees who have Roth contributions as part of their excess deferrals will owe taxes on the Roth earnings as well.

Employees will receive a separate IRS Form 1099-R indicating the amount of the earnings. The earnings must be reported as income in the year in which the distribution is made. The distribution is reported to the IRS.

Distributions of excess deferral and associated earnings are not considered an early withdrawal and are therefore not subject to an IRS tax penalty. This is provided the excess deferral and associated earnings are distributed by April 15 following the year the excess deferrals were made.

What Happens to the Agency Matching Contributions (FERS Employees) That Were Associated with the Excess Elective Deferrals Returned to the Employee?

A FERS employee’s agency will be notified when the employee requests excess elective deferrals and associated earnings returned to the employee. The agency is then required to remove the agency TSP matching contributions associated with these excess elective deferrals.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.