Deferral limit involving SIMPLE IRA and 401(k) plans
“I have a client—over age 50—who participates in a savings incentive match plan for employees (SIMPLE) IRA plan with one of his employers and a 401(k) plan with a separate employer. How much can my client defer into the SIMPLE IRA plan and 401(k) plan?”
ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
Highlights of Discussion
- To determine the answer to your question your client must look at his overall Internal Revenue Code Section (IRC §) 402(g) employee salary deferral limit and the rule that limits employee salary deferrals to the SIMPLE IRA plan under IRC § 408(p)(2)(A)(ii).
- For each tax year IRC §402(g) limits an individual’s overall employee salary deferrals combined across all eligible plans (e.g., deferrals made to a SIMPLE IRA plan and 401(k) plan) to a set amount. For 2016 and 2017, a person’s 402(g) limit is 100 percent of compensation up to a maximum of $18,000 if he or she is under age 50, and is $24,000 if he or she is age 50 or greater and making catch-up contributions.
- The maximum amount that a SIMPLE IRA plan participant may defer into the SIMPLE IRA plan is limited to 100 percent of compensation up to a maximum of $12,500 for 2016 and 2017 or, if he or she is age 50 and over, to $15,500 (which includes catch-up contributions of $3,000).
- Therefore, your client, being over age 50, could choose to make employee salary deferral contributions to the SIMPLE IRA plan in any amount as long as he does not exceed 100 percent of compensation up to $15,500. He could defer the balance of his 402(g) limit up to 100 percent of compensation up to $24,000 to the 401(k) plan IRS Publication 560 and IRS Notice 98-4, Q&A C-3.
Seth, age 53, participates in a SIMPLE IRA plan with Employer A and a 401(k) plan with Employer B. Based on his compensation he decides to defer $15,500 to his SIMPLE IRA plan ($3,000 of which is considered a catch-up contribution). In order to stay within his 402(g) annual limit across all eligible plans in which he participates, Seth may only defer up to $8,500 to his 401(k) plan. Note that Seth’s overall 402(g) limit of $24,000 could be allocated as he wishes between the two plans, as long as his deferrals do not exceed $15,500 to the SIMPLE IRA plan.
An individual who participates in a SIMPLE IRA plan and a 401(k) plan of a different employer must look at his or her overall 402(g) employee salary deferral limit and the rule that limits employee salary deferrals to the SIMPLE IRA plan in order to determine the amount that can be deferred into each plan.