I happened to have joined a practice in December 2005. The practice provided full funding of the 401(k) contribution ($44000 in 2006, $45000 in 2007). Under the plan, I would receive 0% if I left after 1 year, 1/3 after 2 years, and would be fully vested after three. I initially enojyed working in the practice but after a few months, the environment changed for the worse and I began to contribute the maximum employee contribution (15K for 2006 and 15.5k for 2007) thinking I would only be there for two years.

Now, If I stayed for a full three years, I would effectively contributed more than the maximum (adding the employer contribution and the employee contributions I made into the plan in 2006 and 2007).

My question is whether I need to withdraw the excess employee contributions now and will there be penalties assessed (I am also assuming there will be an additional tax burden given the extra income (given this was a pre tax to post tax withdrawal as well as an early distribution)?

Thanks for your patience regarding the long post.

Zip Code: 02169

Tough question.

I actually have a question to you. Are you sure the account was overfunded?

My understanding of the rules is that the total amount of money that could have been contributed into your employer's defined contribution retirement plan each year is limited - up to $44k in 2006 and $45k in 2007. And that total factors in your salary deferrals as well as contributions made on your behalf by your employer.

Any money you put in as salary deferrals, therefore, generally reduce the amount your employer can put away on your behalf.

The best people to talk to are the plan's "Third Party Administrator". Every plan uses TPA's to records all the activity within the plan, and to make sure the plan stays in compliance with the complicated rules applicable to retirement plans. They will be able to get you the best answer, since they are the ones who should be most familiar with your employer's plan. (Plus, there is a very good chance that they helded set up the plan.)

Zip Code: 01801