What Are Payroll Deductions? 2020

The plan treats $6,000 of Mary’s deferrals as catch-up contributions. Under the requirements of ADP testing, the average salary deferral made by HCEs may only exceed the average contribution of regular employees by a certain percentage. If HCEs are found to have exceeded the contribution limit required by ADP testing, the plan must return excess contributions or risk losing its tax-qualified status.

For the 2017 plan year, she deferred $24,500 to the plan. The limit on catch-up contributions for 2018 is $6,000.

As noted above, the most you can contribute to your 401 if you’re at least 50 years old is $26,000 in 2020. The IRS calls this money that you put into the account “elective deferrals.” They are separate from any employer match your company may offer. A 403 is a type of qualified retirement plan which is similar to a 401 and is available in certain industries. These plans allow your employees to contribute and save on a pre-tax and after tax basis, with the opportunity for employer matching contributions as well. In the education and healthcare sectors, these plans are the most common retirement vehicle.

What Are The Roth 401(k) Contribution Limits?

$18,500 is includable in the ADP Test (the remaining $500 is catch-up). The plan fails the ADP Test and Nancy’s excess deferrals are calculated as $8,000. Nancy has already used up $500 toward her catch-up limit for 2018. The remaining $5,500 of the catch-up limit is applied toward Mary’s excess deferrals so that Mary receives a corrective distribution of $2,500 of her elective deferrals. Susan is a participant in a 401 plan that permits catch-up contributions. She is age 54 and is a catch-up eligible participant.

The Internal Revenue Service carefully scrutinizes the contributions of highly compensated employees to ensure they do not benefit unfairly from tax-deferred retirement savings plans, such as 401 plans. But catch-up contributions are not included in actual deferral percentage testing because they can skew testing results. Nancy is an HCE participant in a calendar year 401 plan that allows for catch-up contributions. Nancy attained her 49th birthday on or before 12/31/17. For the 2018 plan year, Nancy makes $19,000 in elective deferral contributions.

Mary is a participant in a 401 plan that allows for catch-up contributions. Mary attained her 49th birthday on or before 12/31/17. The plan limits an employee’s elective deferral contributions to 6% of compensation. She can make elective deferral contributions in calendar year 2018 up to $9,600 ($60,000 X 6% plus $6,000 catch-up limit). John is a participant in a 401 plan that allows for catch-up contributions. John attained his 49th birthday on or before 12/31/17.

• Jill attained her 49th birthday on or before 12/31/17.
• Types of pretax deductions include, but are not limited to, health insurance, group-term life insurance and retirement plans.
• No employer contributions or forfeiture are allocated to Jill’s account for 2018.
• For the 2018 plan year, Jill has compensation of $100,000 and makes $8,000 in elective deferral contributions ($100,000 X 2% plus $6,000 catch-up).
• Jill is the sole key employee participant in a Top-Heavy calendar year 401 plan that allows for catch-up contributions and otherwise limits elective deferral contributions for key employees to 2% of compensation.

Bill is a participant in a calendar year 401 plan that allows for catch-up contributions. Bill attained his 49th birthday on or before 12/31/17. For the 2018 plan year, Bill makes $20,000 in elective deferral contributions. Bill may receive total employer contributions and forfeiture allocations of $41,000. Since Bill made at least $6,000 in elective deferral contributions, $6,000 is treated as catch-up contributions and only $14,000 counts toward the $55,000 Section 415 limit.

The Top-Heavy minimum contribution requirement for the non-key employee participants is 2% of compensation (the lesser of 3% or the highest allocation rate to a key employee). Types of pretax deductions include, but are not limited to, health insurance, group-term life insurance and retirement plans. And while employees are not required to participate, it’s often in their best interest to do so. Pretax contributions can save them considerable money compared to what they would pay for benefits and other services post-tax.

Retirement Services & Planning

For 2018, the limitation on catch-up contributions to a 401 plan, a 403 plan, a governmental 457 plan and a SARSEP is $6,000. The annual limitation for 2018 on catch-up contributions to a SIMPLE-401 and a SIMPLE-IRA is $3,000. See COLA Increases for Dollar Limitations on Benefits and Contributions for other years. Elective deferrals by a participant in excess of limits imposed under the plan document or by statute are allowed pursuant to IRC Section 414 under certain circumstances. These contributions, commonly referred to as “catch-up” contributions, include elective deferrals to a 401 plan, 403 plan, governmental 457 plan, SARSEP, SIMPLE-401, and SIMPLE-IRA. This Snapshot analyzes who is eligible to make a catch-up contribution to a 401 plan pursuant to IRC Section 414.

Harry is a participant in a calendar year 401 plan that allows for catch-up contributions. Harry attained his 49th birthday on or before 12/31/17. For the 2018 plan year, Harry makes $3,000 in elective deferral contributions. Harry may receive total employer contributions and forfeiture allocations of up to $55,000. Since Harry made less than $6,000 in elective deferral contributions, all $3,000 is treated as catch-up contributions that do not count toward the $55,000 Section 415 limit.

What Is The Ltd Deduction On Paychecks?

Jill is the sole key employee participant in a Top-Heavy calendar year 401 plan that allows for catch-up contributions and otherwise limits elective deferral contributions for key employees to 2% of compensation. Jill attained her 49th birthday on or before 12/31/17. For the 2018 plan year, Jill has compensation of $100,000 and makes $8,000 in elective deferral contributions ($100,000 X 2% plus $6,000 catch-up). No employer contributions or forfeiture are allocated to Jill’s account for 2018.

The plan does not otherwise limit an employee’s elective deferral contributions. John can make elective deferral contributions in calendar year 2018 up to $24,500 ($18,500 limit plus $6,000 catch-up limit). The catch-up portion of John’s elective deferral contributions is not included when calculating John’s benefit rate for the Average Benefits Test. Mary is a participant in a 401 plan that permits catch-up contributions. She is age 55 and is a catch-up eligible participant.

However, to encourage those nearing retirement to ramp up their savings, the IRS allows plan participants over 50 to make annual catch-up contributions that exceed these limits. For 2020 and 2021, eligible employees may contribute an additional $6,500, increasing the total limit to $26,000 for employee contributions and $64,500 overall for 2021 and $63,500 for 2020. In addition, you stand to gain even more if your company offers some type of employer match on your contributions.

Susan’s total allocation ($18,500 plus $4,625 plus $35,000) exceeds the dollar limitation on annual additions under IRC Section 415 by $3,125 ($58,125 less $55,000 is $3,125). The plan treats $3,125 of Susan’s elective deferrals as catch-up contributions. Tom is a participant in a 401 plan that permits catch-up contributions and limits elective deferrals to 10% of a participant’s compensation. For the 2018 plan year, his compensation was $100,000. The plan treats $6,000 of Tom’s deferrals as catch-up contributions. Catch-up contributions may be made to a 401 plan, a 403 plan, a governmental 457 plan, a SARSEP, a SIMPLE-401 or a SIMPLE-IRA.

Elective deferrals to the plan are permitted up to the IRC Section 401 limit ($18,500 for 2018). The plan provides for a matching contribution equal to 25% of her elective deferrals. The plan also permits discretionary profit sharing contributions that are allocated pursuant to a predetermined formula set forth in the plan. She receives a discretionary profit sharing contribution in the amount of $35,000.