415 and other limits

[Guest Tesla]

I'm a bit of a novice trying to figure out how contribution limits apply to 401(k) or other DC plans. My main interest is in percentage limits rather than the dollar limits.

I see that under section 415, total DC contributions are limited to 100% of compensation. At least, loosely speaking. The questions I have are:

1.) What language specifies whether the 401(k) contributions themselves are included in compensation? Obviously, if 401(k) contributions were included in comp, then it isn't a limit on 401(k) contribs.

2.) I read somewhere that the comp figure is based on the previous rather than the current year. Where would that be specified?

3.) What are the consequences of over-contributing? I mean, if a correction is not attempted.

Also,

4.) Do I gather correctly that the 25% limit under 404 is based on a company's total workforce, so a particular employee could receive well over that amount?

Thanks!

[Tom Poje]

real briefly

1. comp is generally w-2 comp or similar definition, bumped up to include deferral. most if not all docmuments spell this out quite plainly.

2. only determination of HCE and key employees is based on prior year.

3. over contributing on an in individual is cause for plan disqualification. over contribution the deduction limit is cause for tax penalties.

4. the 25% deduction included only those employees who are benefiting, not ineligible and other employees in the plan who are not benefitting

[ESOP Guy]

Tom is correct. To add although in regards to 4 it is possible to do what you ask even with the added concept that Tom mentions. So it is possible for you to compute the proper 25% deduction limit and for someone to get more then 25%. The 25% limit is a GROUP limit the 415 limit is an individual limit.

If you are going to do this much my I suggest taking some of the Sunguard Relience basic 401(k) classes. In a matter of a few days their classes that cover the basics of 401(k) plans can get one a fair knowledge of the basics.

But as Tom mentioned do not blow these limits the down side is very expensive for the plan or sponsor.

[BG5150]

If you are going to do this much my I suggest taking some of the Sunguard Relience basic 401(k) classes. In a matter of a few days their classes that cover the basics of 401(k) plans can get one a fair knowledge of the basics.

Or you can take ASPPA's intro Retirement Plan Fundamentals tests.

PS: It's Sungard Relius

One last thing: you will never really get 100% of compensation for 401(k), as some will money will be required to be withheld for Medicare, etc.

Last, last thing: your plan document should (has to) spell out what the correction of a 415 failure will be. Usually, it's a refund of 401(k) money first, then Employer money.

[Kevin C]

Last, last thing: your plan document should (has to) spell out what the correction of a 415 failure will be. Usually, it's a refund of 401(k) money first, then Employer money.

Starting about 2007, most documents replaced the old correction methods with a reference to correction under EPCRS. There have been some questions here about being able to refund deferrals repeatedly due to the EPCRS requirement to have procedures in place to prevent failures. I think Rev. Proc. 2013-12 helps with that issue.

From Rev. Proc. 2013-12 Section 4.04:

... A plan that provides for elective deferrals and nonelective employer contributions that are not matching contributions is not treated as failing to have established practices and procedures to prevent the occurrence of a §415© violation in the case of a plan under which excess annual additions under §415© are regularly corrected by return of elective deferrals to the affected employee within two and one-half months after the end of the plan's limitation year. The correction, however, should not violate another applicable Code requirement. ...

[Guest Tesla]

Great help! A few return thoughts:

1.) I should have specified I meant to ask what statutory/regulatory language refers to 401(k) plans in terms of compensation.

For instance, I'm looking at 26 C.F.R. § 1.415-2:

• (d)(1): "Except as otherwise provided, compensation within the meaning of section 415©(3) includes all remuneration described in paragraph (d)(2)... Paragraph (d)(3) of this section provides examples of types of remuneartion not includible in compensation within the meaning of section 415©(3)."
• (d)(2): Doesn't appear to include retirement contributions of any type. Does appear to include fringe benefits included in gross income.
• (d)(3): Discusses "deferred compensation" not includible in GI.

Thus I assume compensation does not include 401(k). But I'm not sure what "deferred compensation" means here, and I wanted to be sure. I'm hoping that at least for basic DC plans, a plan could not call it compensation for purposes of the 415 limit (maybe that's to say, without rendering it taxable?).

2.) My basic understanding, ultimately, is that your employer's 401(k) contributions usually can't be much more than your salary. Of course it may be limited further if you have other plans (and there are some limited ways to raise the ceiling with other types of comp). But whereas it used to be that the contributions were capped at 25% of your salary, now with EGTRRA the contributions could be up to the full amount of your basic GI-type pay. Still, the 100% does reflect a real limit. I'm just laying this out to make sure I'm not completely missing the boat.

3.) My question about the consequences is just to get a sense of whether one would say it is "penalized" or just not "incentivized." I realize that's a philosophical question (see Justice Roberts on personal mandates as tax), at least in part.

Thanks very much, again.

[Kevin C]

You are looking at the pre-EGTRRA regulations. You need to look in 1.415©-2. EGTRRA changed the definition of compensation under Section 415© to include deferrals.

1.415©-2(b)Items includible as compensation.—

For purposes of applying the limitations of section 415, except as otherwise provided in this section, the term compensation means remuneration for services of the following types—

(1) The employee's wages, salaries, fees for professional services, and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the employer maintaining the plan, to the extent that the amounts are includible in gross income (or to the extent amounts would have been received and includible in gross income but for an election under section 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b)). These amounts include, but are not limited to, commissions paid to salespersons, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan as described in §1.62-2©.

[Guest Tesla]

I'm sorry, does "deferrals" mean elective deferrals? You don't mean to say that employer DC contributions would now be considered compensation, do you?

(I was wondering about the citation discrepancies, thank you.)

[BG5150]

"Deferrals" mean 401(k) deferrals. EmployER contributions are NOT part of compensation.

If you have access to the ERISA Outline Book, there is a chart in there that compares all the stuff that gets included for compensation for plan purposes when using safe harbor 415, simplified 415, W2 or withholding wages. They are all pretty close, but there are some subtle differences.