401(a)(17) Annual Compensation Limit

[Guest BenMngr08]

I'm new to this board, so I apologize in advance if there is already a thread on this topic...

I am trying to determine HOW the compensation limit must be administered in terms of limiting of contributions by plan participants. I have seen lots of opinions but have yet to find an IRS ruling or opinion clarifying how plans must handle this. I'll give two scenarios to clarify my question...can anyone lead me to something issued by the IRS with regard to how they view this guideline?

1) Employee A does not participate in the plan until May. By that time, he has already made in excess of $230,000 in eligible compensation. Can he contribute to the plan beginning in May, or has he lost his chance since that annual limit has been reached?

2) Employee B does participate in the plan but gets a very large bonus on 3/15 which she chooses NOT to defer 401(k) from (although it is eligible earnings). The bonus puts her over the annual compensation limit of $230,000. Does she now lose her chance to continue deferring from base earnings at her regular contribution rate?

I appreciate any help anyone can offer...I am just having a hard time finding anything concrete.

Thank you!

[QDROphile]

See the preamble to the section 415 regulations and any number of threads on the subject on the message boards. A recent thread on the subject gives more specific focus on the preamble language.

I can't believe that anyone is still asking these questions.

[Tom Poje]

I'll post the 415 regs again.

on this version, look at page 13, middle column, paragraph begins

"As noted above, the final regulations...

While this issue is one that most would agree how to handle, this is one of the very few places it is actually in writing in any way shape or form by our friends at the IRS. It may be implied elsewhere, but this is pretty definitive. (I can understand this question still cropping up from time to time)

welcome to the bored....er the board!

[Bird]

The answer is no, exceeding the comp limit does not preclude one from continuing to make deferral contributions.

[Guest BenMngr08]

See the preamble to the section 415 regulations and any number of threads on the subject on the message boards. A recent thread on the subject gives more specific focus on the preamble language.

I can't believe that anyone is still asking these questions.

Quite a rude answer considering I stated that I am new to this board and I don't have time to search through thousands of threads. Thanks to the others for your help.

[QDROphile]

If you want to take it personally, go ahead. It was intended as a general statement of affairs, not a barb. This issue was a nonissue from the beginning, and after years of resolution of the nonissue without any credible counterpoint, I can't believe that it still comes up. I can understand why there is no better official statement from the IRS on the subject -- the IRS does not bother to tell us to look for the sun in the east in the morining, either.

[Guest BenMngr08]

If you want to take it personally, go ahead. It was intended as a general statement of affairs, not a barb. This issue was a nonissue from the beginning, and after years of resolution of the nonissue without any credible counterpoint, I can't believe that it still comes up. I can understand why there is no better official statement from the IRS on the subject -- the IRS does not bother to tell us to look for the sun in the east in the morining, either.

Well it's funny that you think it's such a "nonissue" since I have received pretty much a split decision on how it should be administered from several different reliable sources. Tom Poje was the first person that actually led me to something substantial from the IRS (THANK YOU TOM)

And when someone goes looking for answers you should not make them feel stupid or like they are wasting someone's time. In searching for all of the threads that supposedly discuss this topic (I found one, by the way), I came across some other responses of yours that were also very rude. Maybe you should learn from those on this board who somehow find it possible to be helpful without being belittling. And you are a moderator? Sad. Very sad.

[Disco Stu]

Well it's funny that you think it's such a "nonissue" since I have received pretty much a split decision on how it should be administered from several different reliable sources.

And when someone goes looking for answers you should not make them feel stupid or like they are wasting someone's time. In searching for all of the threads that supposedly discuss this topic (I found one, by the way), I came across some other responses of yours that were also very rude. Maybe you should learn from those on this board who somehow find it possible to be helpful without being belittling. And you are a moderator? Sad. Very sad.

In that case, I would submit that pretty much half of your sources are not so reliable after all.

I will say that QDROphile's response was more testy than mine would have been, but you haven't exactly been a model of politeness yourself. You came to a professional message board telling us that you can't take the time to do a simple search function for your yourself, but you expect us to take the time to write you a response? Sad. Very sad.

[Bird]

IMO it's a fair question. The poster did some research, came up with different answers, and posed the question. The real problem, and the thing that I find annoying, is that there are folks out there maintaining that you have to cut off deferrals after the comp limit is hit, and they're mucking it up for the rest of us.

[Mike Preston]

Actually, this problem is not likely to go away, no matter what. As indicated earlier, the IRS has precious little out there we can point to. This means that every time somebody new to this issue starts down the path, they will get very little guidance from the IRS. The more schooled and/or competent they are, the more likely they are to attempt to then answer the question themselves, based on the language in the official documents that purport to have an impact on this. They will end that fruitless endeavor the same way that many of us have at one point in time: concluding that a reasonable argument can be made either way.

And they will then no doubt post another message like the OP did.

I wish there was a way to force the IRS to clarify things that we think need clarification. And to do so in a way that isn't difficult to find.

[david rigby]

I wish there was a way to force the IRS to clarify things that we think need clarification. And to do so in a way that isn't difficult to find.

Ah, what a wonderful idea. But wishful thinking. I guess that's why we have BenefitsLink! Thanks, Dave.

[Appleby]

Welcome to Benefitslink BenMngr08 .

Definitely the best place to get answers on benefits/retirement related questions.

Be sure to sign up for the newsletter here http://benefitslink.com/newsletter/ , if you have not already done so.

[K2retire]

So, 7 1/2 years later, I'm being told by an attorney that he has never in 30 years of ERISA practice heard anyone take the position that deferrals could continue after reaching the 401(a)(17) limit -- unless the election was a flat dollar amount. He believes that the document defining compensation using 401(a)(17) means that a deferral election of a percentage of pay is limited to pay up to, but not exceeding, the compensation limit.

Has anything more definitive been published in the intervening years?

[My 2 cents]

So, 7 1/2 years later, I'm being told by an attorney that he has never in 30 years of ERISA practice heard anyone take the position that deferrals could continue after reaching the 401(a)(17) limit -- unless the election was a flat dollar amount. He believes that the document defining compensation using 401(a)(17) means that a deferral election of a percentage of pay is limited to pay up to, but not exceeding, the compensation limit.

Has anything more definitive been published in the intervening years?

I may be showing my ignorance, but in looking at the first hypothetical in the original post, I am practically certain that substantial earnings prior to plan entry could not possibly interfere with making deferrals after plan entry until at least the post-entry earnings themselves reach 401(a)(17). The earnings on which deferrals are being made must be limited by 401(a)(17), but the limit would only apply with respect to the earnings on which deferrals are being made. Ditto for the second hypothetical, with its large bonus on which no deferrals were being made..

If the plan allows (for example) deferrals of up to 10% of earnings, and the participant elects to defer 8%, the participant's deferral for the year can be no greater than 8% of the 401(a)(17) limit. That is how 401(a)(17) works. It is only if one is deferring from the first dollar that 401(a)(17) has the effect of saying "stop!" as the attorney seems to be saying.

[QDROphile]

Sorry (not really) to be so grumpy about it, but the 401(a) (17) limit is an AMOUNT limit, not a TIMING limit. There has never been any credible controversy over the meaning. Honi soit qui mal y pense.

That said, a plan document can create the problem that does not exist in the law because of stupid drafting or cynical drafting by persons whose concern is simplification of payroll processes rather than offering elective deferral opportunity.

At this late date, anyone who "innocently" can't come to the right conclusion deserves contempt, especially KC Retires lawyer.

[Bird]

Agreed. The way I would put it is that it is a PLAN limit, where we can't use comp in excess of the limit in doing calculations. Withholding is not a PLAN function, it is a payroll function.

[Peter Gulia]

QDROphile, thank you for the nice bit of Anglo-Norman French.

[ETA Consulting LLC]

I, too, think the issue has been resolved for some time and understand that different individuals are at different levels of understanding on certain issues regarding retirement plans. I am constantly getting corrected when I repeat information about DB plans (which I know nothing about) that I received from other actuaries. Enough for that

But, I would like to point out a different approach that may be used to address some of this confusion. It's as simple as referring to your plan document to see if there is a clarifying statement on the issue. I use ASCi (DGEM). Their BPD is written to say:
"In determining the amount of a Participant’s Salary Deferrals under the Profit Sharing/401(k) Plan, a Participant may defer with respect to Plan Compensation that exceeds the Compensation Limit, provided the total deferrals made by the Participant satisfy the Elective Deferral Dollar Limit and any other limitations under the Plan."
I understand that not all documents do this, but I like the fact that they addressed this issue head on in theirs. I guess my point is that when you're doing research, It would help to check the plan document to see if there is a clarifying statement on the issue before conducting a lot of additional research.

Just a suggestion on an approach as issues come up.

Good Luck!