Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits
Two annual limits apply to contributions:
Deferral limits for a SIMPLE 401(k) planThe limit on employee elective deferrals to a SIMPLE 401(k) plan is:
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 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 $23,000 for 2014 (the $17,500 regular limit for 2014 plus the $5,500 catch-up limit for 2014). If the plan didn’t permit catch-up contributions, the most Joe could defer would be $17,500. However, if Joe participates in two 401(k) plans, each maintained by an unrelated employer, he can defer a total of $23,000 even if neither plan has catch-up provisions. Of course, Joe couldn’t defer more than $17,500 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 elective deferral limit for the year. You may notify your plan administrator before April 15 of the following year that you would like the excess deferral amount, adjusted for any gains and losses, to be paid from the plan. The plan must then pay you that amount plus allocable earnings by April 15 of the year following the year in which the excess occurred.
Excess withdrawn by April 15. If you withdraw the excess deferral for 2013 by April 15, 2014, it is includable in your gross income for 2013, but not for 2014. The April 15 date is not tied to the due date for your return and is not extended until April 17, 2014. However, any income earned on the excess deferral taken out is taxable in the tax year in which it is taken out. 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Excess not withdrawn by April 15.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, 2014, the excess, though taxable in 2013, 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:
Example 1: Greg, 46, is employed by an employer with a 401(k) plan and he also works as an independent contractor for an unrelated business. Greg sets up a solo 401(k) plan for his independent contracting business. Greg contributes the maximum amount to his employer’s 401(k) plan for 2013, $17,500. Greg 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, $17,500. He has enough earned income from his business to contribute the overall maximum for the year, $51,000. Greg can make a nonelective contribution of $51,000 to his solo 401(k) plan. This limit is not reduced by the elective deferrals 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 $5,500 of elective deferrals for 2013. His catch-up contribution could be split between the plans in any proportion he chooses. His maximum nonelective contribution to his solo 401(k) plan would remain $51,000 even if he contributed the full $5,500 catch-up contribution to this plan.
Compensation limit for contributions Remember that annual contributions to all of your accounts - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts - may not exceed the lesser of 100% of your compensation or $51,000 for 2013 and $52,000 for 2014. In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. The compensation limitation is $255,000 for 2013 and $260,000 for 2014.
- A limit on employee elective deferrals; and
- An overall limit on contributions to a participant’s plan account (including the total of all employer contributions, employee elective deferrals, and any forfeiture allocations).
- $17,500 (in 2013 and 2014)
- The $17,500 amount may be increased in future years for cost-of-living adjustments
Deferral limits for a SIMPLE 401(k) planThe limit on employee elective deferrals to a SIMPLE 401(k) plan is:
- $12,000 (in 2013 and 2014)
- This amount may be increased in future years for cost-of-living adjustments
- Your plan's terms may impose a lower limit on elective deferrals
- If you are a manager, owner, or highly compensated employee, your plan might need to limit your elective deferrals to pass nondiscrimination tests
- $5,500 to traditional and safe harbor 401(k) plans (in 2013 and 2014)
- $2,500 to SIMPLE 401(k) plans (in 2013 and 2014)
- These amounts may be increased in future years for cost-of-living adjustments
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 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 $23,000 for 2014 (the $17,500 regular limit for 2014 plus the $5,500 catch-up limit for 2014). If the plan didn’t permit catch-up contributions, the most Joe could defer would be $17,500. However, if Joe participates in two 401(k) plans, each maintained by an unrelated employer, he can defer a total of $23,000 even if neither plan has catch-up provisions. Of course, Joe couldn’t defer more than $17,500 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 elective deferral limit for the year. You may notify your plan administrator before April 15 of the following year that you would like the excess deferral amount, adjusted for any gains and losses, to be paid from the plan. The plan must then pay you that amount plus allocable earnings by April 15 of the year following the year in which the excess occurred.
Excess withdrawn by April 15. If you withdraw the excess deferral for 2013 by April 15, 2014, it is includable in your gross income for 2013, but not for 2014. The April 15 date is not tied to the due date for your return and is not extended until April 17, 2014. However, any income earned on the excess deferral taken out is taxable in the tax year in which it is taken out. 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, 2014, the excess, though taxable in 2013, 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:
- elective deferrals
- employer matching contributions
- employer nonelective contributions
- allocations of forfeitures
- 100% of the participant's compensation or
- $51,000 ($56,500 including catch-up contributions) for 2013 ($52,000, or $57,500 including catch-up contributions for 2014)
Example 1: Greg, 46, is employed by an employer with a 401(k) plan and he also works as an independent contractor for an unrelated business. Greg sets up a solo 401(k) plan for his independent contracting business. Greg contributes the maximum amount to his employer’s 401(k) plan for 2013, $17,500. Greg 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, $17,500. He has enough earned income from his business to contribute the overall maximum for the year, $51,000. Greg can make a nonelective contribution of $51,000 to his solo 401(k) plan. This limit is not reduced by the elective deferrals 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 $5,500 of elective deferrals for 2013. His catch-up contribution could be split between the plans in any proportion he chooses. His maximum nonelective contribution to his solo 401(k) plan would remain $51,000 even if he contributed the full $5,500 catch-up contribution to this plan.
Compensation limit for contributions Remember that annual contributions to all of your accounts - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts - may not exceed the lesser of 100% of your compensation or $51,000 for 2013 and $52,000 for 2014. In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. The compensation limitation is $255,000 for 2013 and $260,000 for 2014.