Plan Contribution Limits
Kimberly A. Reed Principal, CPA
4 June 2018
It is very important to make sure that you understand the limits that apply to your retirement plan. There is a limit on employee elective deferrals as well as an overall limit on contributions to a participant’s account. The limit on employee elective deferrals (for traditional and safe harbor plans) is $18,500 in 2018. This is the aggregate of all elective deferrals an employee has made to all plans in which they may participate in any given year. If a plan participant’s elective deferrals are more than the annual limit, correction will need to be made. A lesser amount may apply if the plan’s terms impose a lower limit on elective deferrals.  If your plan allows, participants who are age 50 or over at the end of the calendar year can also make catch-up contributions.

The additional elective deferrals you may contribute is $6,000 in 2018 to traditional and safe harbor 401(k) plans.

If it is determined that a participant has contributed more than the elective deferral limit for the year, the plan administrator should be notified before April 15 of the following year that the excess deferral amount, adjusted for any gains and losses, should be paid from the plan. The plan must then pay that amount plus allocable earnings by April 15 of the year following the year in which the excess occurred. If a participant withdraws the excess deferral for 2017 by April 15, 2018, it can be included in their gross income for 2017, but not for 2018. The April 15 date is not tied to the due date for your return. However, any income earned on the excess deferral taken out is taxable in the tax year in which it is taken out. The distribution is not subject to the additional 10{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} tax on early distributions. If they don’t take out the excess deferral by April 15, 2018, the excess, though taxable in 2017, is not included in their cost basis in figuring the taxable amount of any eventual distributions from the plan. In effect, an excess deferral left in the plan is taxed twice: once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan. Corrective distributions of excess deferrals (including any earnings) are reported to participants by the plan on Form 1099-R, Distributions  From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

In addition, there is an overall limit on contributions. Total annual contributions to all accounts in plans maintained by one employer (and any related employer) are limited.

The limit applies to the total of:
• elective deferrals (but not catch-up contributions),
• employer matching contributions,
• employer non-elective contributions, and
• allocations of forfeitures.

The annual additions paid to a participant’s account cannot exceed the lesser of:
1. 100{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} of the participant’s compensation, or
2. $55,000 ($61,000 including catch-up contributions) for 2018.

However, an employer’s deduction for contributions to a defined contribution plan (profit- sharing plan or money purchase pension plan) cannot be more than 25{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} of the compensation paid (or accrued) during the year to eligible employees participating in the plan.

Finally, the compensation limitation is $275,000 in 2018.

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