How to apply deferral percentage to compensation exceeding 415 limit?

[SavingsRUS]

When a participant has compensation greater than the $265,000 compensation limit for 2016, is his deferral election percentage applied based only on his $265,000 compensation, or on his full compensation for the year?

For example, if a participant with $300,000 in compensation elected to defer 6% of pay for 2016, is his deferral election applied to his full $300,000 compensation to result in a total deferral amount of $18,000? ($300,000 x 0.06 = $18,000)? Or is his deferral election applied only to his compensation up to the $265,000 compensation limit, resulting in a total deferral amount of $15,900? ($265,000 x 0.06 = $15,900)?

[Mike Preston]

Full. $18,000 is the result.

[Lou S.]

It is 401(a)(17) you are talking about not 415. But it goes by the definition of compensation in the plan.

Your plan could be drafted to limit the deferral based on comp only up to the 401(a)(17) limit but that's not generally how documents are drafted.

[SavingsRUS]

Thanks, Lou. Treasury Regulation section 1.401(a)(17)-1(a) states that a defined contribution plan may not base allocations on compensation in excess of the annual compensation limit. Treasury Regulation section 1.401(a)(17)-1(b) also states that the compensation taken into account for any employee in determining plan allocations is limited to the annual compensation limit. It would seem that "allocations" means profit sharing and match, but not deferrals.

[Mike Preston]

This question has been answered a gazillion times in this forum. Have you tried searching for past threads?

[Mr Bagwell]

Savings,

Check the plan document definitions.

The one we use says that an employee can defer on compensation above the comp limit provided they don't fail other plan limitations like 402g, 415....

Thanks

[Mike Preston]

https://www.irs.gov/pub/irs-tege/epn_2012_1.pdf

See page 7.

[david rigby]

Yes, answered many times before. (Mike might be overstating to say "gazillion", but its close.)

Just as important is the advice in Post #7: check the plan document, to review its definition.