Section 401(a) 17 Limits

[MARYMM]

We make employer contributions of 3% of pay to the 401(k) Plan and also a match up to 1% of pay. I understand that the amount of compensation on which we can calculate these contributions is capped at $220,000 for 2006. So the maximum employer contribution we can make this year is $6,600 and the maximum match we can contribute this year is $2200.

The 401(a) 17 limits are being discussed on another forum. Someone is contending that the limits also apply to salary reduction contributions. They are stating that if an ee has not reached the maximum salary deferal contribution of $15,000 by the time his/her comp has reached $220,000, the ee is prohibited from making further deferal contributions. In effect, the ee is not allowed to spread the $15,000 evenly over all the payrolls of the year. The poster there stated "Section 401(a)(17) limitation takes precedent over the 401(k) limits and that it is even cross-limited by the Section 415 limits."

Is this true ?

Thanks in advance for your assistance.

[austin3515]

That's not true.

I can't cite any regulations/notices for you, but they're out there. I'm sure someone will have it handy!

[austin3515]

Found it!

1999 ASPPA Conference Q&A w/ the IRS

59. In a 401(k) plan, does 401(a)(17) preclude the following:

A. A earns $300,000 annually. He enrolls in 401(k) calendar year plan in August, after earning $175,000. He defers $10,000 in the balance of the year.

B. A earns $300,000 annually. He participates in a calendar year 401(k) plan making monthly deferrals of a flat dollar amount of 1/12 of $10,000 in 1998, even though his pay exceeded $160,000 before he was done making elective deferrals.

C. Same as 2, but deferrals are a percentage of pay (3.33333%).

IRS answer:

We believe that all three scenarios should be ok. This will be discussed additionally from the podium.

http://www.asppa.org/archive/gac/1999/99irsq&a.htm

[MARYMM]

Found it!

1999 ASPPA Conference Q&A w/ the IRS

59. In a 401(k) plan, does 401(a)(17) preclude the following:

A. A earns $300,000 annually. He enrolls in 401(k) calendar year plan in August, after earning $175,000. He defers $10,000 in the balance of the year.

B. A earns $300,000 annually. He participates in a calendar year 401(k) plan making monthly deferrals of a flat dollar amount of 1/12 of $10,000 in 1998, even though his pay exceeded $160,000 before he was done making elective deferrals.

C. Same as 2, but deferrals are a percentage of pay (3.33333%).

IRS answer:

We believe that all three scenarios should be ok. This will be discussed additionally from the podium.

http://www.asppa.org/archive/gac/1999/99irsq&a.htm

Thanks so much ! I really appreciate the assistance.

[MARYMM]

We are continuing to have a lively discussion about the 401(a) 17 limits on our payroll forum. A participant in the discussion has raised this question:

" What is the purpose of the $220,000 wage limit if it is not to stop the deferral? "

What was the intent of the 401(a) 17 comp limit ?

Thanks

[Archimage]

Maybe this will help. The regulations under 1.401(a)(17) state "a plan may not base allocations...on compensation in excess of the annual compensation limit." 1.401(a)(17) lists the specific code sections to which it applies. They are: Code Secs. 401(a)(4), 401(a)(5), 401(1), 401(k)(3), 401(m)(2), 403(b)(12), 404(a)(2), 410(b)(2), and 414(s)(3) (IRS Reg. §1.401(a)(17)-1©(1)). Base on these references the compensation limit applies to contribution, allocations, and discrimination testing. It does not refer to payroll elections.

[Guest mjb]

a 17 limits the amount of comp which can be taken into account for benefits purposes in plan year to 220k. a17 does not prescribe how limit is applied to comp paid in plan yr. Eligible Comp can be any $220k earned in plan yr, not first 220k earned in plan year. E.g. employee who is paid 360k per yr can commence deferrals on Sept 1 and have deferrals taken out of last 120k in comp paid in 2006. a17 limits benefits that can be accrued under DB plan to 220k of comp paid during the plan yr. even though employee was paid 360k during 12 month period. DC plan could count all of employees comp paid in plan yr up to max amount for contributions though employee began participation in mid yr, e.g., employee who earns 20k per month joins plan on July 1. Plan can base employer contributions on 220k of comp paid in calandar yr even though ee only earned 120k after becoming eligible to participate.

[RCK]

Keep in mind that the plan may say something entirely different. That is, the plan may very well limit deferrals to comp up to the 401(a) 17 limit.

And I believe that some payroll systems automatically do that.

[Bird]

What was the intent of the 401(a) 17 comp limit ?

So an owner making $1,000,000 can't make a 3% pro rata contribution and get a $30,000 allocation. Likewise, for testing, a $15,000 deferral would only be 1.5%, and Congress thinks that's not fair.

It has nothing to do with limiting deferrals once someone has reached a certain threshold. Well, as noted, it's possible that a plan could be written that poorly, but fortunately I've never seen it.

[QDROphile]

Keep in mind that the plan may say something entirely different. That is, the plan may very well limit deferrals to comp up to the 401(a) 17 limit.

And I believe that some payroll systems automatically do that.

If the payroll system behaves that way and the plan does not expressly provide for the same timing limitation, the plan will have a disqualifying operation. Many payroll systems used to operate that way; I have not heard so much about it recently because people have wised up. But until we start shooting people who claim that the 401(a) (17) limit is a timing limit, the notion won't go away.

[Bird]

If the payroll system behaves that way and the plan does not expressly provide for the same timing limitation, the plan will have a disqualifying operation.

Good point. This is NOT something to be meekly accepted "because the payroll company says so."

[austin3515]

Bump up.

Any uodates to this conversation?  Just seems hard to believe that this was not addressed yet.

At first when I saw this link by the IRS I thought, "great, they finally addressed"

https://www.irs.gov/retirement-plans/401k-plans-deferrals-and-matching-when-compensation-exceeds-the-annual-limit

Except that they almost intentionally did not use the most apporpriate example which would have been someone electing 3% of $360,000.  Instead they said she could elect $1,500 from each paycheck all year.  I guess that helps a little, but still leaves open the question if "3% of $360,000" is an acceptable deferral election.  Anything? Anyone?  Or is the most recent guidance the Q&A above?

[Bird]

Personally I don't think it required any more guidance than we had, but I'd take this new guidance as being definitive.  The part below seems pretty clear; they contemplate that a plan could base deferrals on the first $270K but lead off with the phrase "although not common."  What more do you want, something that says "we are hereby answering Austin Powers' question once and for all..."?  ?

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 $270,000 of compensation, then you must stop allowing Mary to make salary deferrals when her year-to-date compensation reaches $270,000, even though she hasn’t reached the annual $18,000 limit on salary deferrals, and must base the employer match on her actual deferrals.

[austin3515]

Yes but by not using the example of X% of $360,000 they seem to be uncomfortable writing down on their website that any contributions can be determined by referencing comp >$275K.  Do you agree?  Why else wouldn't they be explicit about that?

[Bird]

Shrug.  Could be it just isn't on their radar and whoever came up with the example never thought about it that way.  I just don't believe they are dodging the question.  I dunno, but I am in no way uncomfortable with basing % deferrals on any/all comp (and saying that payroll company that limit it are stupid and wrong).

Plus I was going to say I think they have addressed this sufficiently and it looks like Tom posted a pretty good cite for that.

[Tom Poje]

sigh (since this question comes up every year, at least I put an answer in the Coverage and Nondiscrimination Answer Book 12-11 - makes it easy to post a response!)

The preamble to the final 415 regulations states that:

 

As noted above, the final regulations provide that a plan cannot take into account compensation in excess of the section 401(a)(17) limit. In addition, the final regulations provide that elective deferrals can only be made from compensation as defined in section 415(c)(3). However, in applying these two rules, a plan is not required to determine a participant's compensation on the basis of the earliest payments of compensation during a year. [Emphasis added.]

Issue 2012-1 (Mar. 20, 2012) of the IRS Employee Plan News offers the same advice:

 

“We're Glad You Asked #2”

We have a 401(k) plan and some employees’ compensation will exceed the annual compensation limit this year. Should we stop their salary deferrals when their compensation reaches the annual compensation limit? How do we calculate the employee’s matching contribution?

Unless your plan terms provide otherwise, the salary (elective) deferral limit is applied uniformly to the compensation that the employee receives throughout the year.

[https://www.irs.gov/pub/irs-tege/epn_2012_1.pdf]

[austin3515]

Tom I knew I had seen something somewhere!  Thanks!