How much can you contribute when plan year crosses calendar year

[Alan Simpson]

Have a 401(k) plan with a plan year of 8/1/1999 through 7/31/2000. One participant (the owner) is able to defer 6.25% out of first paycheck of the plan year (August 1999) and reach the $10,000 maximum deferral. When is the next time that this participant can defer into the plan. Is it after January 1, 2000 since this begins a new tax year for the participant or is it the next plan year?

If it is as of January 1st, and the maximum amount that can be deferred is increased, then what limit should be used (1999 or 2000) for the "second" deferral into the plan? Also, is there anything I should be aware of when doing plan testing?

Your assistance is appreciated and any cite(s) would be helpful.

[Disco Stu]

Jeez, I'm in the wrong line of work. This guy's 1st paycheck is for $160,000 (or more)?

You are right, that the next time this person would be able to defer is 1/2000. I'm assuming that this person had not made any other salary deferrals during the 1999 calendar year.

The calendar year 402(g) limit for 2000 will apply to any deferrals made after 1/1/2000. This limit may or may not remain at $10,000 for 2000.

There's really nothing stopping this participant from deferring the max for 2000 right away in 1/2000, but as a practical matter, it may be advisable to have this HCE wait until the after the start of the 8/1/2000 plan year. Unless you have a lot of slack in your ADP/ACP tests, having $20,000 (or more) of deferrals in a single plan year for an HCE could cause problems in those tests.

[Guest GregSelf]

Agree with Stu...with slight clarification of his statement that "The calendar year 402(g) limit for 2000 will apply to any deferrals made after 1/1/2000."

I think the date should be 7/31/2000. Any deferrals made prior to 8/1/2000, will be subject to the limit for 1999, since they would occur during the plan year beginning 8/1/1999.

[Fredman]

My understanding is that the 402(g) limitation period is the participant's taxable year. In general, a particpant's taxable year is the calender year, so the 402(g) limitation period would also be the calender year.

I agree with Disco's post...if this P's taxable year is the calender year they can again defer the max in 1/2000.

[Disco Stu]

I concurr with Stu as well. The 402(g) limit is strictly a calendar year deal.

[Kathy]

I agree with all that the 402(g) limit applies to the individual's tax year - but make sure to read the plan document carefully to make sure that it doesn't add similar restrictions to the plan year!

[LCARUSI]

So we're assuming the employee's tax year is the calendar year, which is not always true.

[Kathy]

No, we never assume - you know what that does don't you??? However, in 15 years I've only met one individual (a farmer) with a tax year of something other than the calendar year. So for most, the 402(g) limit is per calendar year, even if the plan has a different year. And, if the plan is written to permit it, someone could defer $10,000 at the end of one calendar year and $10,000 at the beginning of the next for a $20,000 deferral in one plan year - then comes 415, 404 and all the other fun testing to see if he gets to keep it all!