“What is a plan participant’s deferral limit if he or she participates in more than one 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, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Connecticut is representative of a common inquiry related to contribution limits.
Highlights of the Discussion
The IRC § 402(g) annual limit on employee salary deferrals is an individual taxpayer limit—not a per plan limit. Consequently, an individual under age 50 for 2018 was limited to deferring 100 percent of compensation up to a maximum of $18,500 (or $24,500 if age 50 or more)—regardless of the number of plans in which he or she participated during the year. For 2019, the respective limits are $19,000 and $25,000.
This annual limit is inclusive of employee salary deferrals (pre-tax and designated Roth) an individual makes to all of the following plan types:
- Savings incentive match plans for employees (SIMPLE) plans [both SIMPLE IRAs and SIMPLE 401(k) plans ] and
- Salary reduction simplified employee pension (SARSEP) plans. 
(Note: A person who participates in a 457(b) plan has a separate deferral limit that includes both employee and employer contributions.)
If a taxpayer exceeds the annual limit—the result is an excess deferral that must be timely corrected. The IRS could disqualify a plan for violating the elective deferral limitation, resulting in adverse tax consequences to the employer and employees under the plan. But there are ways to correct the error. It is important to follow the correction procedures contained in the governing plan document.
Generally, if a participant has excess deferrals based on the elective deferrals made to a single 401(k) plan or plans maintained by the same employer, then the plan must return the excess deferrals and their earnings to the participant no later than April 15th of the year following the year the excess was created [Treas. Reg. § 1.402(g)-1(e)(1) ].
In the case of an employee who participates in more than one salary deferral-type plan of unrelated employers, it may be difficult for the plan sponsor to recognize there is an excess deferral. Therefore, the onus is on the participant to notify the plan administrator of the amount of excess deferrals allocated to the plan prior to the April 15th correction deadline (usually a notification date is specified in the plan).
  The 2018 limit for deferrals to a SIMPLE IRA or 401(k) plan is $12,500 ($15,500 if age 50 or more).
  The 2018 limit for deferrals to a SARSEP plan is 25% of compensation up to $18,500 ($24,500 if age 50 or more).
document). The plan is then required to distribute the excess and earnings to the participant no later than the April 15th correction deadline [Treas. Reg. § 1.402(g)-1(e)(2) ].
If the excess deferrals are timely withdrawn by the April 15th correction deadline, then
- The excess deferrals are taxed in the calendar year deferred;
- The associated earnings are taxed in the year distributed;
- There is no 10% early distribution penalty tax; and
- There is no 20% withholding (since the amounts are ineligible for rollover).
If the excess deferrals are withdrawn after the April 15th correction deadline, then
- Each affected plan of the employer is subject to disqualification and would need to go through the IRS’s Employee Plans Compliance Resolution System (EPCRS) to properly correct the error;
- The excess deferrals are subject to double taxation—taxed in the year contributed and in the year distributed;
- The associated earnings are taxed in the year distributed; and
- The excess deferrals could also be subject to the 10% early distribution penalty tax if no exception applies.
Joe, a 45-year old worker, made his full salary deferral contribution of $18,500 to Company A’s 401(k) plan by October 2018. He then left Company A to go to work for Company B, an unaffiliated company, on November 1, 2018, and was immediately allowed to participate in the 401(k) plan. Not understanding how the 402(g) limit works, he begins making salary deferral contributions to Company B’s 401(k) plan. In December his financial advisor informed him that may have over contributed for 2018.
The onus is on Joe to report the excess salary deferrals to Company B. Company B is then required to distribute the excess deferrals and earnings by April 15, 2019. The plan document also requires forfeiture of any matching contributions associated with the excess deferral.
Although the annual IRC §402(g) employee salary deferral limit is an individual employee limit, exceeding it can have consequences for both the employee and the plan sponsor. Timely correction of the excess is key to minimizing possible negative effects. Plan sponsors should review the correction procedures outlined in their plan documents, and follow them carefully should they detect or be informed of an excess deferral. Also rely on the IRS’s EPCRS corrections program.