Plan Limits & Important Deadlines
Employee Elective Deferral Limit $17,500
If the limit is exceeded, the plan has until April 15th to refund the overage. Failure to refund the overage can result in plan disqualification and double taxation to the employee. The deposits of employee contributions must be made “as soon as administratively feasible”. It is our recommendation that you deposit deferrals at the time of each payroll. For plan with less than 100 eligible employees, the DOL has provided a seven business day safe harbor period for the timely deposit of 401(k) and 403(b) contributions and participant loan payments.
Employee Catch-up Contributions $5,500
For those employees age 50 or older, an additional employee contribution can be made.
Annual Additions $52,000
Annual Additions include employee deferrals, match, profit sharing, allocated forfeitures, and other plan contributions. Amounts exceeding this limit must either be returned to the participant or forfeited by the end of the following plan year. Employee Catch-up Contributions are not included in this limit.
Top Heavy 60% of Plan Assets
A plan will be Top-Heavy if 60% of the plan assets belong to the key employees. When a plan becomes Top-Heavy, an employer contribution of 3% may be required. Key employees are defined as:
an officer who earns in excess of $170,000
a more than 5% owner
a more than 1% owner with earnings over $150,000
ADP/ACP – Nondiscrimination Testing
These tests compare the employee deferral and employer match contribution percentages of the Highly Compensated Employees with the Non-highly Compensated Employees. The IRS Code defines how far apart these percentages may be for the test to be passing. If the test fails, there are several correction options. The most common correction is a refund to the Highly Compensated Employees. These refunds must be made within 2 1/2 months after the plan year end to avoid an excise tax of 10% (payable by the employer). If not, the refunds must be made no later than the 12 months following the end of the plan year.
Highly Compensated Employees are defined as:
a more than 5% owner
an employee with earnings exceeding the prior year’s compensation limit ($115,000)
The employer may elect to include only the top 20% of these employees. Although not required, the initial non-discrimination tests are important steps in the process of establishing a plan and preparing for the actual tests performed following the end of the plan year. For purposes of defining the Key and Highly Compensated Employees, family members are included as owners.
Annual Compensation $260,000
The IRS Code limits the amount of compensation the plan can take into account for an employee. For example, the compensation limit is used in determining an employee’s employer contribution and for nondiscrimination tests.
Employer’s Deductible Contribution 25%
The IRS Code limits the amount that may be contributed and deducted in any one year to a qualified defined contribution plan. The limit is a percentage of compensation paid for all eligible participants. Plan employer contributions must be made by the corporate return due date.