IRS: 75% error rate on W2s

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What do you think would be a major warning that something is too complex?  How about if you told people how to do something, offered instructions and all sorts of advice, and yet 75% of the people accidentally messed things up?  Think that would tend to be a red flag?

Well,that’s pretty much the case with reporting 401k contributions on W-2s.  Here’s a direct quote from the IRS:

Project results
Responses showed that 75% of the employers in the sample needed to correct their Forms W-2.”

Seriously, a 75% failure rate?  Once again that just tells me things are way too complicated.

The text of the report is below.  The direct link is


Form W-2 Errors Showing Excess Deferrals

In its 401(k) Excess Deferral Project, the Employee Plans Compliance Unit found errors in elective deferrals reported in Box 12 of Form W-2, Wage and Tax Statement. The project sampled employers who filed Forms W-2 that showed some employees had elective deferrals in excess of the annual limit.

Project results

Responses showed that 75% of the employers in the sample needed to correct their Forms W-2.

Form W-2, Box 12

Employers must report 401(k) elective deferrals in Box 12 of the Form W-2, using the code “D.”

Employer errors

Employers incorrectly reported as 401(k) elective deferrals in Box 12:

  • elective deferrals made to 403(b) or 457 plans, or
  • other non-qualified amounts.

Employers also made errors in reporting Social Security wages and deferred compensation, and used incorrect codes. Form W-2 filers can avoid some of these errors by following the Form W-2 instructions. To correct their previously filed Forms W-2, employers filed over 26,000 Forms W-2C, Corrected Wage and Tax Statement. Because of our compliance contact, most of these employers became aware of software and data transmission problems when moving files back and forth with their third party administrator or payroll vendor and took action to fix those problems for future W-2 filings.

Fixing excess deferral errors

When an employee’s elective deferrals exceed the annual limit during a calendar year, the employee must include the excess amount in income for the year in which it was contributed to the plan. The employee is also taxed on the earnings on the excess elective deferrals in the year the plan distributes them. If the plan doesn’t distribute the excess deferral by April 15 of following year, the excess is taxable in both the year deferred and the year distributed.

Some employers in the sample had already recognized employees who had made excess elective deferrals to their plan. They corrected this by returning the excess deferrals and issuing a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This form is generally filed for each person to whom a distribution of $10 or more is made.

Additional resources

Get help on how to fix excess deferrals and prevent future mistakes in the IRS 401(k) Plan Fix-It Guide.

Learn about correcting other plan errors using the Employee Plans Compliance Resolution System.

Read about other Form W-2 errors found in this project.

Contacting EPCU

If you have questions about how this project relates to your retirement plan, email us and include “401(k) Excess Deferrals” in the subject line.