401k elective deferral limits

[Gary]

A company implements a 401k plan year with its first plan year being 12/1/07 through 11/30/08.

The employee earns compensation of $20,000 for December 2007 and defers $15,500 into the 401k plan for the plan year beginning 12/1/07.

The employee is set to earn $20,000 for November 2008.

The employee wants to defer $15,500 of the 11/2008 compensation to the 401k plan under the premise that it is within the 2008 tax year limits.

Is this permitted?

Or is this not allowed under the premise that the deferral limit for the plan year ending 11/30/08 was met back in December 2007 and thus not allowing any more deferrals for that plan year?

Thanks.

[fiona1]

It is absolutely permitted. The $15,500 deferred in 12/07 is applied to the 2007 402(g) limit and the $15,500 deferred in 11/08 is applied to the 2008 402(g) limit. The 402(g) limit simply prescribes a limit on the amount of deferrlas that can be excluded from gross income for a calendar year.

Where you might run into trouble is nondiscrimination and 415 limits. Assuming the limitation year is the same as the plan year, this participant already has $31,000 in annual additions. If they received any match or employer money - they may be over the 415 limit.

The ADP test will include $31,000 in deferrals, which will result in high deferral rate. Some of those deferrals may need to be refunded if the ADP test fails. (This assuming the plan is even subject to ADP/ACP).

[Kevin C]

The deferral limit is an individual limit, not a plan limit. It is based on the participant's taxable year which is almost always the calendar year, not the plan year.

If the participant is an HCE, you better be safe harbor.

[Guest Sieve]

I agree with the above 2 posts: the 402(g) limit is a limit for the taxable year of an individual (invariably--perhaps always--the calendar year). (IRC Section 402(g)(1)(A).) That limit is not based on the plan year.

Frankly, that appears to run counter to IRC Section 401(a)(30) and its regs, which seem to indicate that there is a single 402(g) limit in a plan year. But, as you can see by mine and the other comments, this approach (and Corbel's language, below) are consistent with how it's done: if the plan year overlaps 2 taxable years, then the 402(g) limit can be reached in each calendar year, even if all the deferrals fall in one plan year. (Here is Corbel's prototype language from its Basic Plan Document: "A Participant's Elective Deferrals made under this Plan . . . during any calendar year shall not exceed the dollar limitation imposed by Code Section 402(g), as in effect at the beginning of such calendar year . . ." Notice that there is no limitation of just one 402(g) maximum during any plan year.)

Does anyone know how IRC Section 401(a)(30) fits in here? Does that contradict our understanding, or does it stand for something else? Does it mean that deferrals in a 12/1-11/30 plan year must be based on the 402(g) limit for the calendar year in which the plan year starts? If so, then the deferrals in a 12/1/2008-11/30/2009 plan year would be limited to $15,500 in each calendar year (despite the increase to $16,500 for 2009). What does IRC Section 401(a)(30) mean, then?

[Gary]

The plan I am referring to has a Corbel document and in the document it has a section entitled:

4.2 Participant's Salary Reduction Election

4.2 (d) reads:

"For each Plan Year, a Participant's Deferred COmpensation made under this Plan and all other plans of the Employer maintaining this Plan shall not exceed, during any taxable year of the Participant, the limitation imposed by Code Section 402(g), as in effect at the beginning of such taxable year."

So the above appears to imply for the Plan Year beginning 12/1/07, that the deferrals for that Plan year (12/1/07 to 11/30/08) can not exceed the 402(g) limit as in effect at the beginning of such taxable year. Meaning that the deferrals from 12/1/07 to 11/30/08 cannot exceed the 402(g) limit for the 2007 tax year. In other words that the deferrals cannot exceed $15,500 for the PLan Year 12/1/07 to 11/30/08.

Of course perhaps it means that from 12/1/07 to 12/31/07 15,500 can be deferred, if nothing previously deferred for 2007.

And for 1/1/08 to 11/30/08 the same 15,500 can be deferred, as long as no additional amounts are deferred after 11/30/08.

Any comments?

Thanks.

[Blinky the 3-eyed Fish]

Q: what is the tax year of the participant?

A: the calendar year

[Gary]

However, while the tax year of the participant is the calendar year, that doesn't clarify that more than the 402(g) limit can be deferred in the plan year.

For example 15,500 can be deferred in 12/07 for 12/1/07 PY.

And 15,500 can be deferred in 12/08 for 12/1/08 PY.

In the above example 15,500 is deferred in 2007 and 2008, and 15,500 is not exceeded in any Plan year as well.

[Blinky the 3-eyed Fish]

Why doesn't it? There isn't a limit on deferrals in the plan year under 402(g).

[Guest Sieve]

Gary -- You must be quoting from the Corbel volume submitter. The language is the same as I quoted above for the prototype. I think that language supports the consensus conclusion that there can be a different 402(g) limit for each taxable year (calendar year) of the participant, irrespective of the plan year.

Blinky -- I agree with you, but I still can't put that together logically with IRC Section 401(a)(30), which does seem to limit deferrals on a plan year basis (see my earlier discussion, above). Any thoughts on that?

[Mike Preston]

401(a)(30) is the 402(g) limit of the participant for the taxable year of the participant, as it applies to the plan. Hence, if you violate 401(a)(30) you have a problem that is not correctable by merely refunding the excess, you have to go through EPCRS (I think - can somebody confirm that?). The 401(a)(30) limit is applied across the employer so an employer is responsible for ensuring that somebody doesn't defer $10k in Plan 1 of the employer, transfer to a different division, and then defer another $15k in Plan 2. All within the same calendar year.

[Guest Sieve]

So, Mike, "taxable year" in IRC Section 401(a)(30) refers to the participant's taxable year (not the plan's taxable year), and therefore it simply says that the plan (aggregated with other plans of the employer) must limit the deferrals of a participant during the participant's taxable year to the 402(g) limit for that calendar/taxable year?

If I now understand it correctly, then I think it should be able to be corrected as can any other excess deferral under 402(g), since IRC Section 401(a)(30) simply says the plan is not qualified "unless the plan provides . . ."--i.e., it is a plan language provision, which can then result in an operational violation.

[J Simmons]

Gary -- You must be quoting from the Corbel volume submitter. The language is the same as I quoted above for the prototype. I think that language supports the consensus conclusion that there can be a different 402(g) limit for each taxable year (calendar year) of the participant, irrespective of the plan year.

Blinky -- I agree with you, but I still can't put that together logically with IRC Section 401(a)(30), which does seem to limit deferrals on a plan year basis (see my earlier discussion, above). Any thoughts on that?

Hi, Larry,

In looking at 401(a)(30), I don't detect the plan year aspect of the limit on deferrals. I see reference to calendar years and to taxable years, but not plan years. What about 401(a)(30) suggests plan years?

[Guest Sieve]

John --

I was reading "taxable year" as being the taxable year of the plan--i.e., the plan year. Apparently, I misread it, and "taxable year" in IRC Section 401(a)(30) refers to the taxable year mentioned in IRC Section 402(g)--"may not exceed the amount of the limitation in effect under section 402(g)(1)(A) for taxable years beginning in such calendar year" (IRC Section 401(a)(30))--which is the taxable year of the employee.

About 10 years ago, I actually did think that the 402(g) limit was a calendar year limit AND also a plan year limit as per IRC Section 401(a)(30), but I soon was disabused of that belief by thinkers more nimble than me. And then, in re-reading IRC Section 401(a)(30) in response to this OP, I once again fell into the same rut, long since having forgotten why I had been convinced that IRC Section 401(a)(30) did not create a plan year limit. Now, you & Mike have once again convinced me that I was misreading and misapplying IRC Section 401(a)(30) today (actually, for me, yesterday). Thanks.

[J Simmons]

Darn. I was hoping there was an interstitial explanation. That would have been fun.

[Guest Sieve]

Interstitial? I looked it up and can't even understand the definition!

Whatever I said to cause you to use that word, I take it back. Or, as Muhammad Ali said to good ol' Mr. Cosell: "I don't know what that means, but if it's good, then I'm it."

[masteff]

The plan I am referring to has a Corbel document and in the document it has a section entitled:

4.2 Participant's Salary Reduction Election

4.2 (d) reads:

"For each Plan Year, a Participant's Deferred COmpensation made under this Plan and all other plans of the Employer maintaining this Plan shall not exceed, during any taxable year of the Participant, the limitation imposed by Code Section 402(g), as in effect at the beginning of such taxable year."

Unless Sieve selectively omitted the lead-in clause "For each Plan Year", then the two quotations ARE NOT THE EXACT SAME. "For each Plan Year" introduces unnecessary confusion about how the limit is applied.... is it the "Plan Year" or "any taxable year of the Participant". If we read the sentence literally, then I would place weight on the words "during any" to arrive at the consensus provided above.

I just wanted to be sure the difference isn't lost and the ambiguity not noted.