Deferral limits

[pbarrett]

Is the deferral limit still on a participant basis versus a plan basis?

Example- Participant works for 2 different corporations. He/She makes $25,000 at each corportation. The individual is age 40. Is the limit $13,000 or $26,000? (Assume 2004 year).

[Mike Preston]

Yes. ;-)

In each respective plan, the limit is $13,000. There is no statutory requirement that one plan be aware of the existence of another plan.

So, a participant is free to defer $13,000 into two plans, thereby having $26,000 put into the two plans.

This would not be a smart thing for the participant to do, however.

If a participant is in two plans and defers more than the $13,000 limit in any one calendar year, then only $13,000 will be excluded from income. Further, the participant will be taxed on all of the monies when they come out of the respective plans because the IRS doesn't allow a taxpayer to keep track of what portion of a 401(k) deferral was not excluded from income versus what portion was excluded from income in any year.

Hence, if a participant defers more than the maximum in a given calendar year, most plans allow the participant to send them a letter (or otherwise notify them) by March 1 of the year following that they wish to withdraw a portion of their deferrals because they exceeded the 402(g) limit.

Note that plans DO NOT have to honor such a request. Most plans are written to allow these sorts of requests. But there is no statutory requirement to do so.

So a participant can find that they have no recourse other than pay tax on the amount deferred in excess of $13,000 and then again pay tax on the monies when received. Not good.

Better to not go over the 402(g) limit in the first place!

[Guest Kevin A. Wiggins]

Is a 457 plan involved?