Compensation Limit and 401k deferrals

[Guest benefitsanalyst]

Must an employee's deferrals to a 401k plan cease when his compensation for the year has reached $200,000?

We have an employee who makes well over $200,000 that just started to make contributions last month. However, his deductions were recently cut off because his comp for the year reached $200,000.

[david rigby]

Several prior discussions on this topic. Try:

http://www.benefitslink.com/boards/index.php?showtopic=12346

http://www.benefitslink.com/boards/index.php?showtopic=12107

[Brian Gallagher]

thanks pax. exactly what i was looking for.

[MWeddell]

Also take a look at the March 1999 Enrolled Actuaries Meeting gray book, Q&A 30, for some unofficial IRS guidance on this issue.

[david rigby]

I'm not certain of the copyright issues here. For what is worth, the following is copyrighted by the Enrolled Actuaries Meeting. From the 1999 Gray Book:

QUESTION #30

Other DC Issues: Application of Maximum Compensation Limit

In a 401(k) plan, does IRC Section 401(a) (17) preclude the following?

A. Employee A earns $300,000 annually. He enrolls in 401(k) calendar year plan in August, after earning $175,000. He defers $10,000 for the balance of the year.

B. Employee A earns $300,000 annually. He participates in a calendar year 401(k) plan making monthly deferrals of a flat dollar amount of 1/12 of $10,000 in 1998, even though his pay exceeded $160,000 before he was done making elective deferrals.

C. Same as B, but deferrals are a percentage of pay (3.33333%).

RESPONSE

All of the above are acceptable, assuming the plan is not drafted in such a way as to prevent it. In situation C, for example, a plan provision permitting deferrals expressed as a percentage of compensation but not permitting deferrals expressed as a dollar amount could not accommodate deferrals on pay in excess of $160,000. Where the plan permits deferrals expressed as a dollar amount specified in the employee's salary reduction agreement, the reference to a percentage in the individual agreement is irrelevant.