Plan Testing
To meet IRS qualification requirements, 401(k) plans must cap the total contributions allocated to each participant by the 415(c) limit in effect for the year. The limit is a big deal. Violations can lead to steep IRS penalties for employers - including fines or plan disqualification - if not corrected in a timely manner. This trouble is usually easy to avoid. In general, the 415(c) limit is straightforward. When it’s not, a skilled 401(k) provider will know how to account for the complicating factors. We get a lot of questions from employers about the 415(c) limit. Below is a FAQ with answers to the most common questions.
What is the 415(c) Limit?
The 415(c) limit caps the amount of “annual additions” (i.e., total contributions) a 401(k) plan can allocate to participants each “limitation year.” It is subject to annual cost-of-living adjustments.
For 2024, the 415(c) limit is the lesser of:
- $69,000
- 100% of the participant’s gross compensation
The 415(c) limit in effect for the limitation year is based on the last day of the year.
What is the “limitation year” for 415(c) purposes?
Most 401(k) plans define limitation years as the plan year, but a plan can specify any 12-month period for the purpose. When limitation years are not defined by a plan, the calendar year must be used.
What are “annual additions” for 415(c) purposes?
For 415(c) purposes, the following 401(k) contributions are considered annual additions:
- Elective deferrals - including pre-tax and Roth contributions
- Safe harbor contributions
- Profit sharing contributions
- Matching contributions
- Reallocated forfeitures
- Voluntary after-tax contributions
Annual additions do not include:
- “Catch-up” contributions
- Rollover contributions
- Loan repayments
What if the Employer Maintains Multiple Retirement Plans?
The contributions made to certain retirement plans maintained by the same employer count towards the 415(c) limit for 401(k) participants. Related employers – controlled groups and affiliated service groups – are considered the same employer for this purpose.
Contributions to the following plans count:
- 401(a) defined contribution plans – including 401(k)s, profit sharing plans, money purchase plans, and Employee Stock Ownership Plans (ESOPs).
- Simplified Employee Pensions (SEPs)
Contributions to the following plans do not count:
- SIMPLE-IRAs
- 457 plans
- 403(b) plans – 403(b) contributions are usually subject to a separate 415(c) limit.
Are 401(k) and 403(b) contributions always subject to separate 415(c) limits?
No. 401(k) and 403(b) contributions are usually subject to separate 415(c) limits because employers are deemed by the IRS to control 401(k) accounts, while individuals are deemed to control their 403(b) account.
However, this general rule does not apply when an individual has a controlling interest (more than 50%) in the 401(k) plan sponsor. In these cases, the individual is deemed to control their 401(k) account too. As a result, their 403(b) and 401(k) contributions must be aggregated. If the aggregate exceeds the 415(c) limit, the excess is attributed to the 403(b) plan.
Do ADP/ACP corrective refunds count towards the 415(c) limit?
Yes. Contribution refunds necessary to correct a failed ADP or ACP test still count towards the 415(c) limit.
Do 402(g) corrective refunds count towards the 415(c) limit?
Maybe. Elective deferrals distributed to correct an IRC section 402(g) violation do not count towards the 415(c) limit if distributed by the April 15 following the close of the calendar year in which the violation occurred. In contrast, amounts distributed after April 15 count.
Does a short “limitation year” affect the 415(c) limit?
Yes. A short limitation year is created when a plan’s limitation year is amended. When a short limitation year applies, the 415(c) dollar limit must be prorated to reflect the shortened period.
For example, Plan A has a calendar-based limitation year. On June 30, 2020, the limitation year is amended to an off-calendar 12-month cycle ending June 30. As a result, Plan A has a short limitation year for the period January 1, 2020 to June 30, 2020.
Since the short limitation year ends in 2020, the 2020 415(c) limit ($57,000) applies. Plan A’s prorated 415(c) dollar limit for the January 1, 2020 to June 30, 2020 limitation year is $28,500 ($57,000 x 6/12).
How are 415(c) violations corrected?
When annual additions exceed the 415(c) limit, the issue must be corrected by using one of the correction programs under the IRS’ Employee Plans Compliance Resolution System (EPCRS). Most plans can self-correct the issue using the Self-Correction Program (SCP).
Section 6.06(2) of the current EPCRS Procedure (Rev. Proc. 2021-30) prescribes the following order for distributing the excess amount:
- Distribute unmatched voluntary after-tax contributions (adjusted for earnings) to the affected participant. If any excess remains, proceed to Step 2.
- Distribute unmatched elective deferrals (adjusted for earnings) to the affected participant. If any excess remains, proceed to Step 3.
- Distribute matched voluntary after-tax contributions (adjusted for earnings) and forfeit related matching contributions (adjusted for earnings). If any excess remains, proceed to Step 4.
- Distribute matched elective deferrals (adjusted for earnings) and forfeit related matching contributions (adjusted for earnings). If any excess remains, proceed to Step 5.
- Forfeit profit sharing contributions until the annual additions longer exceed the 415(c) limits.
The amount distributed represents taxable income for the participant. The 10% tax on early distributions under IRC Section 72(t) does not apply. The participant cannot roll their distribution to another qualified plan or IRA.
The amount forfeited can be used to reduce future employer contributions.
Staying Out of Trouble is Easy with the Right Help!
The 415(c) limit is straightforward for most 401(k) participants. However, it can get complicated fast when the contributions to multiple retirement plans or refunds due to failed annual testing must be considered.
The good news? A skilled 401(k) provider will know how to account for these complicating factors – making it easy for employers to stay out of trouble.
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