IRA, Pension, and 401k Plans
Austin Texas Business And
Tax Law Attorney

Background:

Qualified defined contribution retirement plans – such as pension, profit-sharing and 401(k) plans - and IRA-based Simplified Employee Pension (SEP) plans must limit contributions and forfeitures allocated to a participant’s account.

Internal Revenue Code Section 415(c) provides that during a limitation year, the annual additions (total of employer contributions, employee contributions and forfeitures allocated to a participant) cannot exceed the lesser of 100% of the participants compensation or:

$66,000 in 2023
$61,000 in 2022
$58,000 in 2021
$57,000 in 2020
$56,000 in 2019

Annual Additions:

Each participant’s annual additions include the following types of contributions:

Elective salary deferrals, including pre-tax, after -tax and Roth contributions made to qualified plans, and salary reduction contributions made to SEP plans,
Employer profit-sharing contributions
Forfeitures allocated
After-tax employee contributions
Employer matching contributions

Annual additions generally do not include:

Catch-up contributions (IRC 414(v))
Rollover contributions
Loan repayments (unless using above-market interest rates)

Finding the Mistake:

To verify that your plan does not have annual additions above the 415(c) limit, the plan administrator should timely prepare a 415(c) allocation schedule for each plan participant. If you have a service provider that assists you in the operation of your plan, you may want to check with them to determine if a 415(c) schedule is one of the services they provide to your plan. A 415(c) schedule would include:

415 compensation. Find the definition in your plan document
Limitation year: If the plan does not define the limitation year, it is deemed to use the calendar year. A different 12-month period, such as the plan year, may be defined in the plan.
415(c) annual additions limit. The lesser of 100% of compensation or the annual dollar amount specified above.
Total 415(c) annual additions: Total of the above types of contributions allocated to each participant under each defined contribution plan you sponsor.
Excess Annual Additions: The annual additions that are in excess of the 415(c) limit

Fixing the Mistake:

If you determine that participants in your plan have annual additions (contributions) that exceed the 415(c) limit, you can correct this mistake using one of the IRS correction programs described in Rev. Proc. 2021-30. Sections 6.06 outlines special rules for correcting excess annual additions. Most plan mistakes can be corrected using the Self-Correction Program (SCP).

For a participant with both employer contributions and employee elective salary deferral contributions that has annual additions that exceed IRC Section 415(c), correction includes:

Step 1: Distribute unmatched elective salary deferral contributions (adjusted for earnings) to the affected participant. If any excess remains, proceed to Step 2.

Step 2: Distribute elective salary deferral contributions (adjusted for earnings) that are matched, and forfeit related employer matching contributions (adjusted for earnings). If any excess remains, proceed to Step 3.

Step 3: Forfeit employer profit-sharing contributions until the annual additions longer exceed the 415(c) limits.

The employer should report the corrective distribution made to the participant on Form 1099-R. The participant should include the distribution as income but does not have to pay the 10% additional tax on early distributions under IRC Section 72(t). The participant may not rollover the corrective distribution to another qualified plan or to an IRA.

The plan sponsor should transfer the forfeited employer contributions (profit-sharing or matching) to an unallocated plan account. These amounts are used to reduce employer contributions in subsequent years.

Example:

In 2020, John earned $100,000 in compensation as an employee of the QP Corporation and was a participant in QP Corporation’s 401(k) Plan. At the end of 2020, John is age 48. The plan permits elective contributions and provides a 100% matching employer contribution of the first $11,000 of an employee’s elective salary deferral contribution, as well as discretionary profit-sharing contributions. The plan does not allow an employee to designate any portion of their elective contribution as a Roth contribution. QP Corp did not allocate any forfeitures to participants in 2020. During 2020, John had the following contributions to his account:

elective salary deferral contributions: $19,000
employer matching contributions: $11,000
employer profit-sharing contributions: $38,000

John’s $19,000 deferral is less than the $19,500 deferral limit for 2020.

John’s 415(c) contribution limit for 2020 is $57,000 (the lesser of $57,000 or 100% of John’s $100,000 compensation). John’s annual addition of $68,000 (19,000 + 11,000 + 38,000) for 2020 exceeded the 415(c) limit of $57,000 by $13,000.

QP discovered the failure to limit the contributions for John in 2021.

Applying these steps, the correction of the excess contribution of $13,000 for John would be as follows:

Step 1: John made $8,000 in unmatched elective contributions (elective salary deferral of $19,000 less the $11,000 QP Corp matching contributions).

Note: The plan must distribute the $8,000 (adjusted for earnings) to John. After the distribution, the remaining $5,000 excess is corrected under Step 2.

Step 2: John has $11,000 of elective salary deferrals that were matched, and $11,000 of matching contributions left. The plan must distribute $2,500 in elective salary deferrals (adjusted for earnings) and forfeit the corresponding matching contribution of $2,500 (adjusted for earnings) back to the plan. This step fully corrects John’s remaining $5,000 excess.

As a result, John will receive a total distribution of $10,500 ($8,000 + $2,500, adjusted for earnings). John includes the entire $10,500 (adjusted for earnings) corrective distribution in his income for 2021. John will not owe the additional 10% tax on early distributions under IRC Section 72(t). The distribution is not eligible for rollover to another qualified plan or an IRA.

In addition, the plan will forfeit $2,500 (adjusted for earnings) from John’s matching contribution account to an unallocated plan account and used to reduce employer contributions for current and subsequent years.

Correction Programs Available:

The IRS Employee Plans Compliance Resolution System (EPCRS) permits any size business or organization that sponsors a retirement plan (including SEP and SIMPLE IRA plans) to identify and correct most plan failures. The two EPCRS programs available for plans that want to voluntary correct failures to limit contributions to participants are:

Self-Correction Program (SCP) – Correct certain plan failures without contacting the IRS or paying a user fee. You can self-correct most plan mistakes without ever contacting the IRS. Significant mistakes can be self-corrected by the end of the 3rd year following the year the mistake occurred, insignificant mistakes at any time.
Voluntary Correction Program (VCP) – Correction of failures not eligible for SCP or to get the IRS’s written agreement that specified failures were properly corrected.

QP Corp may correct this mistake using SCP. Even if QP Corp determined this mistake was significant, they’re still within the three-year limit to correct significant mistakes. For more information about EPCRS, check EPCRS Overview.

Avoiding the Mistake:

The employer should monitor employees’ elective contributions made during the limitation year. After determining the corresponding matching contribution under the terms of the plan, the employer should consider the IRC Section 415 limitations while determining:

the amount of discretionary profit-sharing contribution, and
where appropriate, how profit-sharing contributions could be allocated among plan years.

IRS Announces 2019 401k, IRA, And Pension Plan Limitations.

WASHINGTON — The Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2019. The IRS today issued technical guidance detailing these items in Notice 2018-83.

Highlights of Changes for 2019

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $18,500 to $19,000.

The limit on annual contributions to an IRA, which last increased in 2013, is increased from $5,500 to $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the saver’s credit all increased for 2019.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2019:

For single taxpayers covered by a workplace retirement plan, the phase-out range is $64,000 to $74,000, up from $63,000 to $73,000.
For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $103,000 to $123,000, up from $101,000 to $121,000.
For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $193,000 and $203,000, up from $189,000 and $199,000.
For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income phase-out range for taxpayers making contributions to a Roth IRA is $122,000 to $137,000 for singles and heads of household, up from $120,000 to $135,000. For married couples filing jointly, the income phase-out range is $193,000 to $203,000, up from $189,000 to $199,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $64,000 for married couples filing jointly, up from $63,000; $48,000 for heads of household, up from $47,250; and $32,000 for singles and married individuals filing separately, up from $31,500.

Highlights of Limitations that Remain Unchanged from 2018

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $6,000.

Detailed Description of Adjusted and Unchanged Limitations

Section 415 of the Internal Revenue Code (Code) provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made following adjustment procedures similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.

Effective Jan. 1, 2019, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $220,000 to $225,000. For a participant who separated from service before Jan. 1, 2019, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2018, by 1.0264.

The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2019 from $55,000 to $56,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2019 are as follows:

The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $18,500 to $19,000.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $275,000 to $280,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $175,000 to $180,000.
The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a five year distribution period is increased from $1,105,000 to $1,130,000, while the dollar amount used to determine the lengthening of the five year distribution period is increased from $220,000 to $225,000.

The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $120,000 to $125,000.

The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $6,000. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $3,000.

The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $405,000 to $415,000.

The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $600.

The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from $12,500 to $13,000.

The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $18,500 to $19,000.

The limitation under Section 664(g)(7) concerning the qualified gratuitous transfer of qualified employer securities to an employee stock ownership plan remains unchanged at $50,000.

The compensation amount under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation remains unchanged at $110,000. The compensation amount under Section 1.61 21(f)(5)(iii) is increased from $220,000 to $225,000.

The dollar limitation on premiums paid with respect to a qualifying longevity annuity contract under Section 1.401(a)(9)-6, A-17(b)(2)(i) of the Income Tax Regulations remains unchanged at $130,000.

The Code provides that the $1,000,000,000 threshold used to determine whether a multiemployer plan is a systemically important plan under Section 432(e)(9)(H)(v)(III)(aa) is adjusted using the cost-of-living adjustment provided under Section 432(e)(9)(H)(v)(III)(bb). After taking the applicable rounding rule into account, the threshold used to determine whether a multiemployer plan is a systemically important plan under Section 432(e)(9)(H)(v)(III)(aa) is increased for 2019 from $1,087,000,000 to $1,097,000,000.

The Code also provides that several retirement-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2019 are as follows:

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $38,000 to $38,500; the limitation under Section 25B(b)(1)(B) is increased from $41,000 to $41,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $63,000 to $64,000.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the Retirement Savings Contribution Credit for taxpayers filing as head of household is increased from $28,500 to $28,875; the limitation under Section 25B(b)(1)(B) is increased from $30,750 to $31,125; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $47,250 to $48,000.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the Retirement Savings Contribution Credit for all other taxpayers is increased from $19,000 to $19,250; the limitation under Section 25B(b)(1)(B) is increased from $20,500 to $20,750; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $31,500 to $32,000.
The deductible amount under Section 219(b)(5)(A) for an individual making qualified retirement contributions is increased from $5,500 to $6,000.

The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) increased from $101,000 to $103,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers who are active participants (other than married taxpayers filing separate returns) increased from $63,000 to $64,000. If an individual or the individual’s spouse is an active participant, the applicable dollar amount under Section 219(g)(3)(B)(iii) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $189,000 to $193,000.

The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $189,000 to $193,000. The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $120,000 to $122,000. The applicable dollar amount under Section 408A(c)(3)(B)(ii)(III) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0.

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