Maxing Out Deferral

An employee has reached the $270K salary cap but not the $18K deferral limit so deductions are still taking place. The question was asked: Are the deferrals still exempt from the applicable taxes even though the salary limit has been reached? Or does the tax savings stop since the $270k limit has been reached?

Continue withholding deferrals. That compensation is eligible for deferrals, just not for testing calculations. 

Bah Humbug. goes against everything the Grinch stands for, but as 401king notes you can keep deferring.

if you insist on cites, here are a couple (which I put in the Coverage and Nondiscrimination Answer Book Q 12:11   :

The preamble to the final 415 regulations states that:

As noted above, the final regulations provide that a plan cannot take into account compensation in excess of the section 401(a)(17) limit. In addition, the final regulations provide that elective deferrals can only be made from compensation as defined in section 415(c)(3). However, in applying these two rules, a plan is not required to determine a participant's compensation on the basis of the earliest payments of compensation during a year. [Emphasis added.]

Issue 2012-1 (Mar. 20, 2012) of the IRS Employee Plan News offers the same advice:

“We're Glad You Asked #2”

We have a 401(k) plan and some employees’ compensation will exceed the annual compensation limit this year. Should we stop their salary deferrals when their compensation reaches the annual compensation limit? How do we calculate the employee’s matching contribution?

Unless your plan terms provide otherwise, the salary (elective) deferral limit is applied uniformly to the compensation that the employee receives throughout the year.

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

Not asked in the original question, but if there is a match involved, make sure that you double check that calculation if the match is made each pay period.  I've seen a few incorrect match contributions once you test at year-end and limit compensation to $270K.