Retirement Plan Contribution Limits | Ed Slott and Company, LLC

Retirement Plan Contribution Limits

Hello,

I have a client who is self-employed and operates under a sole proprietorship. In 2018 before I met him he had been contributing to a SEP IRA in which he contributed $20,000. After we met and decided it was to his benefit to open an Individual K plan, we rolled the SEP IRA into the Individual K and started monthly employee deferrals of $2,041.66 between September & December of 2018 (4 months).

In May of 2019, he made a prior year Profit Sharing Contribution (for 2018) of $30,000. In total between his SEP IRA and Individual K he contributed $58,166.64 to his retirement plans for 2018's plan year. Since my client is over 50, he is eligible to defer $55,000 plus catch-up contributions of $6,000 for 2018. His 2018 taxable income is north of $300,000 so the $50,000 total in Profit Sharing contributions is allowed. My question is since he did not max out his employee deferral contributions at $18,500, is he eligible to contribute the additional $6,000 as catch-up provisions or is he limited to $55,000?

Since his contributions fell right in between $55,000 & $61,000 I can go either way on this and have received professional confirmation on both sides of the question.

Can you please help me make a case for keeping the money in the plan or reclassifying part of the prior year Employer contribution to 2019.

Thanks - Todd

  • Did the client make an employee elective contribution election by 12/31/2018? It would have had to specify bin some deterministic way that $2,041.66/month or $8,166.64/year in contributions would be made. While you have until your tax filing deadline (~4/15) including extensions (~10/15) the following year, the election must be made by 12/31 of the tax year.
  •  Was an tax extension requested? It would be required to contribute the $30,000 in May.
  • The annual addition addition (2018 = $55,000) does not include catch-up contributions. Catch-up contributions only apply after the employer elective contribution limit (2018 = $18,500, 2019 = $19,000) is reached.
  •  For 2018 the client is limitted to $55,000 in annual additions and has $3,166.64 in excess annual additions. However, this is easily remidied by only claiming $46,833.36 in employer contributions for 2018. Becasue the 2018 $30,000 contribution was made in 2019, by not deducting the $3,166.64 for the 2018 tax year it becomes automatically allocated for the 2019 tax year.
  • While it does not apply here. FYI and future reference. there is a limit of compensation (2018 = $275K, 2019 = $280K) that can be used for calculating contributions.

[Edit:  Perhaps disregard this comment, but see comments below.]  I disagree that there is any excess contribution for 2018.  The catch-up is part of the employee elective deferrals.  The amount of the catch-up elective deferrals is simply the amount of the total elective deferrals that would result in exceeding any of the statutory limits without regard to the catch-up, in this case the limit on annual additions.  With $50,000 of employer contributions, he can treat the $8,166.64 of elective deferrals as $5,000 of regular elective deferrals and $3,166.64 of catch-up elective deferrals (absent any plan provision that dictates otherwise).

  • From https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions.
    • "Elective deferrals are not treated as catch-up contributions until they exceed the limit of $19,000 in 2019 ($18,500 in 2018) or the ADP test limit of section 401(k)(3) or the plan limit (if any)."
  • Also, see CFR 1.414(v)-1 Catch-up contributions.
  • You can not select the catch up contribution amount. It is an automatic determination on the last day of the plan year based on limits from different circumstances, none of which exist in this case. Therefore, there can be no catch up contributions
  • There is most definitely $3,166.64 in excess annual additions from $3,166.64 in excess employer contributions and should be reallocated to 2019 contributions by reducing the Form 1040, Schedule 1, Line 28 deduction by the tax filing deadline including extenstions (10/15). 

Thank you for your help with this question. I decided to have our client re-code the excess contribution to a 2018 Employee Deferral contribution as he operates under a sole proprietorship and has no W2 salary or technically no “salary deferral”.  That seems to me to imply that just because the investment company coded $8,167 as salary deferral, those dollars and all of the dollars that came into the 401k plan after it, $30,000 in May 2019, could be called whatever suites the purpose? Sole proprietorships have a different deadline for funding their “salary deferrals” since their Schedule C income is not known usually until well after the year end. Moving forward he will be contributing the max deferral plus cath-up during the calendar year and it will be much cleaner espacially when the assets surpass $250,000 and he will have to complete a Form 5500 EZ annually for the Individual K.Thank you 

  • Good point, IRS Pub 560 makes that same explicit statement about elective deferrals not being treated as catch-up contributions until elective deferrals exceed the regular elective deferral limit (or they exceed the ADP test limit or plan limit).  I wonder why, then, that CFR 1.414(v)-1(b)(1)(i) makes any mention of the limit on annual additions and § 415(c).  If the regular elective deferral limit is the only statutory limit that defines a catch-up contribution, it seems that CFR 1.414(v)-1(b)(1)(i) should make no mention of the annual addition limit or § 415(c).
  • I wonder if the IRS guidance in Pub 560 is simply wrong in indicating that only elective deferrals in excess of the regular elective deferral limit are catch-up contributions.  Statements to this effect in Pub 560 seem contrary to the discussion in IRS Treasury Regulation REG–142499–01 which proposed CFR 1.414(v)-1, made final in T.D. 9072 without any substantial modification with respect to this issue.
  • https://www.irs.gov/pub/irs-regs/14249901.pdf
  • https://www.irs.gov/irb/2003-37_IRB#TD-9072
  • Note that IRM section 4.72.2.10(3) defines catch-up contributions as exceeding the elective deferral limit imposed by either § 401(a)(30) or § 415 and that's what an IRS examiner will go by.
  • https://www.irs.gov/irm/part4/irm_04-072-002#idm140613712217472
 

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