Unless your plan terms provide otherwise, the salary (elective) deferral limit is applied uniformly to the compensation that the employee receives throughout the year. Compensation and contribution limits are subject to
annual cost-of-living adjustments. The annual limits are: Example: Mary, age 49, whose annual compensation is $360,000 ($30,000 per month), elects to defer $1,500 per calendar month, up to $19,000 for the 2019 year. Mary may contribute to the plan until she reaches her annual deferral limit of $19,000 even though her compensation will exceed the annual limit of $280,000 in October. If your plan provides for
matching contributions, you must follow the plan’s match formula. Example: Your plan requires a match of 50% on salary deferrals that do not exceed 5% of compensation. Although Mary earned $360,000, your plan can only use up to $280,000 of her compensation when applying the matching formula for 2019. Mary’s matching contribution would be $7,000 (50% x (5% x $280,000)). Although Mary makes salary deferrals of $19,000, only $14,000 (5% of $280,000) will be matched. She must receive a
matching contribution of $7,000 (50% x $14,000) under the terms of the plan. Although not common, a plan can specifically require that salary deferrals cease once a participant’s compensation reaches the annual limit. If your plan specifies that salary deferrals be based on a participant’s first $280,000 of compensation, then you must stop allowing Mary to make salary deferrals when her year-to-date compensation reaches $280,000, even though she hasn’t reached the annual $19,000 limit on salary deferrals, and must base the employer match on her actual deferrals. Additional resources
The limit on employee elective deferrals
(for traditional and safe harbor plans)is: Generally, you aggregate all elective deferrals you made to all plans in which you participate to determine if you have exceeded these limits. If a plan participant’s elective deferrals are more than the annual limit, find out how you can
correct this plan mistake. The limit on employee elective deferrals to a SIMPLE 401(k) plan is:
Plan-based restrictions on elective deferrals
Catch-up contributions for those age 50 and overIf permitted by the 401(k) plan, participants age 50 or over at the end of the calendar year can also make catch-up contributions. You may contribute additional elective salary deferrals of:
You don’t need to be “behind” in your plan contributions in order to be eligible to make these additional elective deferrals. Catch-ups for participants in plans of unrelated employersIf you participate in plans of different employers, you can treat amounts as catch-up contributions regardless of whether the individual plans permit those contributions. In this case, it is up to you to monitor your deferrals to make sure that they do not exceed the applicable limits. Example: If Joe Saver, who’s over 50, has only one employer in 2020 and participates in that employer’s 401(k) plan, the plan would have to permit catch-up contributions before he could defer the maximum of $26,000 for 2020 (the $19,500 regular limit for 2020 plus the $6,500 catch-up limit for 2020). If the plan didn’t permit catch-up contributions, the most Joe could defer would be $19,500. However, if Joe participates in two 401(k) plans, each maintained by an unrelated employer, he can defer a total of $26,000 even if neither plan has catch-up provisions. Of course, Joe couldn’t defer more than $19,500 under either plan and he would be responsible for monitoring his own contributions. The rules relating to catch-up contributions are complex and your limits may differ according to provisions in your specific plan. You should contact your plan administrator to find out whether your plan allows catch-up contributions and how the catch-up rules apply to you. Treatment of excess deferralsYou have an excess deferral if the total of your elective deferrals to all plans is more than the deferral limit for the year. Notify your plan administrator before April 15 of the following year that you would like the excess deferral amount, adjusted for earnings, to be distributed to you from the plan. The April 15 date is not tied to the due date for your return. Excess withdrawn by April 15. If you exceed the deferral limit for 2020, you must distribute the excess deferrals by April 15, 2021.
The distribution is not subject to the additional 10% tax on early distributions. Excess not withdrawn by April 15. If you don't take out the excess deferral by April 15, 2021, the excess, though taxable in 2020, is not included in your cost basis in figuring the taxable amount of any eventual distributions from the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan. Reporting corrective distributions on Form 1099-R. Corrective distributions of excess deferrals (including any earnings) are reported to you by the plan on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Overall limit on contributionsTotal annual contributions (annual additions) to all of your accounts in plans maintained by one employer (and any related employer) are limited. The limit applies to the total of:
The annual additions paid to a participant’s account cannot exceed the lesser of:
However, an employer’s deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) cannot be more than 25% of the compensation paid (or accrued) during the year to eligible employees participating in the plan (see Employer Deduction in Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). There are separate, smaller limits for SIMPLE 401(k) plans. Example 1: In 2020, Greg, 46, is employed by an employer with a 401(k) plan, and he also works as an independent contractor for an unrelated business and sets up a solo 401(k). Greg contributes the maximum amount to his employer’s 401(k) plan for 2020, $19,500. He would also like to contribute the maximum amount to his solo 401(k) plan. He is not able to make further elective deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $19,500. He would also like to contribute the maximum amount to his solo 401(k) plan. Greg is not able to make further elective salary deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $19,500, to his employer’s plan. However, he has enough earned income from his business to contribute the overall maximum for the year, $57,000. Greg can make a nonelective contribution of $57,000 to his solo 401(k) plan. This $57,000 limit is not reduced by the elective deferrals Greg made under his employer’s plan because the limit on annual additions applies to each plan separately. Example 2: In Example 1, if Greg were 52 years old and eligible to make catch-up contributions, he could contribute an additional $6,500 of elective deferrals for 2020. His catch-up contribution could be split between the plans in any proportion he chooses. Or, Greg may contribute the full $6,500 catch-up contribution to his solo 401(k) plan, making a total contribution of $63,500 for 2020. This is because, although he made nonelective contribution to his solo 401(k) plan up to the maximum of $57,000, the $57,000 limit is not reduced by the elective deferral catch-up contributions. Compensation limit for contributionsRemember that annual contributions to all of your accounts maintained by one employer (and any related employer) - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures, to your accounts, but not including catch-up contributions - may not exceed the lesser of 100% of your compensation or $61,000 for 2022 ($58,000 for 2021 and $57,000 for 2020). This limit increases to $67,500 for 2022; $64,500 for 2021; $63,500 for 2020 ($62,000 for 2019) if you include catch-up contributions. In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited to $305,000 for 2022; $290,000 in 2021 ($285,000 in 2020). Additional resources:
How much can I contribute to my 401k if I am highly compensated?Highly compensated employees (HCEs) can contribute no more than 2% more of their salary to their 401(k) than the average non-highly compensated employee contribution. That means if the average non-HCE employee is contributing 5% of their salary, an HCE can contribute a maximum of 7% of their salary.
What is considered a highly compensated employee for 2022?For the preceding year, received compensation from the business of more than $125,000 (if the preceding year is 2019, 130,000 if the preceding year is 2020 or 2021 and $135,000 if the preceding is 2022), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.
Can a highly compensated employee contribute to a Roth 401 K?In addition to the avoidance of tax on Roth earnings, highly compensated participants who are not able to make Roth IRA contributions because their adjusted gross income is higher than the established maximum are not subject to similar income restrictions when deciding whether to make Roth 401(k) contributions.
What is the threshold for highly compensated employees?Received more than $130,000 in compensation in the previous year, if that year was 2021 (the amount applicable for 2022 is $135,000), and was in the top 20% of employees as ranked by compensation by the employer. 1.
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