Annual Deferral Limit When Participating in Multiple Retirement Plans

The law imposes an annual cap on the amount of elective deferrals that can be made by an individual. Elective deferrals are salary reduction contributions that a plan participant makes from his or her compensation into a SIMPLE IRA, SAR-SEP, 401(k), or a 403(b) plan. This annual limit is periodically adjusted for inflation and includes both pre-tax deferrals and designated Roth contributions made to a 401(k) or a 403(b) plan.

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Annual limit applies to all retirement plan accounts an individual might have in the current year. When an employee works at two or more jobs or switches jobs in the middle of the year, it is necessary to track elective deferral contributions made to plans to ensure that the total limit is not violated.

Example. From January 1, 2014, to March 30, 2014 Lisa contributed $5,000 to a 403(b) plan sponsored by the hospital where she was employed. On April 1, she terminated employment with the hospital and joined a private medical practice, which sponsors a 401(k) plan. Her participation in the 401(k) plan begins on June 1, 2014. The maximum amount of elective deferrals Lisa can make to the 401(k) plan sponsored by the medical practice for the remainder of 2014 is $12,500 ($17,500 reduced by $5,000 of contributions made to the 403(b) plan sponsored by her former employer).

NOTE: Salary reduction contributions made to a 457 plan are not considered when applying annual elective deferral contribution cap. Therefore an individual who participates in a 401(k) or a 403(b) plan and also in a 457 plan can make maximum salary deferrals to both plans in the same year.

What happens if annual limit is exceeded? Any excess, adjusted for earnings, should be withdrawn from the plan by April 15.

Timely distribution of excess (by April 15):
• Excess deferrals withdrawn by April 15 of the year following the year of deferral are taxable in the calendar year deferred;
• Earnings are taxable in the year they’re distributed;
• There is no 10% early distribution tax and no 20% withholding.

Late distribution of excess (after April 15):
• Retirement plan is at risk for disqualification and needs to correct this failure under Employee Plans Compliance Resolution System (EPCRS);
• Under EPCRS, excess deferrals are subject to double taxation: they’re taxed both in the year contributed and in the year distributed from the plan;
• These late distributions could also be subject to the 10% early distribution tax and 20% withholding requirements.

First Allied Retirement Services developed a variety of tools, reports, and materials to assist you in effective communication about these and other important retirement topics. The rules are complex and to succeed you need to either become an expert or align yourself with the right partner. We are available to be an extension of your team. Retirement Services consultants are ready to partner with you in presenting solutions to your clients and prospects. But we don’t stop there; we help you implement and maintain the plan in partnership with nationally recognized record keeping vendors to offer a complete plan solution. You can reach us at (888) 926-0600 or via email to pensions@firstallied.com.

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