401(k) Plans - Deferrals and matching when compensation exceeds the annual limit
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:
- salary deferrals - $18,000 in 2015 - 2017, plus $6,000 in 2015 - 2017 if the employee is age 50 or older (IRC Sections 402(g) and 414(v))
- annual compensation - $270,000 in 2017. $265,000 in 2015 and 2016 (IRC Section 401(a)(17))
- total employee and employer contributions (including forfeitures) - the lesser of 100% of an employee’s compensation or $54,000 for 2017 ($53,000 for 2015 and 2016 not including "catch-up" elective deferrals of $6,000 in 2015 - 2017 for employees age 50 or older) (IRC section 415(c))
Example: Mary, age 49, whose annual compensation is $360,000 ($30,000 per month), elects to defer $1,500 per calendar month, up to $18,000 for the 2016 year. Mary may contribute to the plan until she reaches her annual deferral limit of $18,000 even though her compensation will exceed the annual limit of $265,000 in September.
Employer matching contributions
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 $265,000 of her compensation when applying the matching formula for 2016. Mary’s matching contribution would be $6,625 (50% x (5% x $265,000)). Although Mary makes salary deferrals of $18,000, only $13,250 (5% of $265,000) will be matched. She must receive a matching contribution of $6,625 (50% x $13,250) under the terms of the plan.
What does your plan say?
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 $265,000 of compensation, then you must stop allowing Mary to make salary deferrals when her year-to-date compensation reaches $265,000, even though she hasn’t reached the annual $18,000 limit on salary deferrals, and must base the employer match on her actual deferrals.
- Retirement Topics – Contributions
- FAQs: Contributions
- Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)