DOLLAR LIMITS WHEN PARTICIPATING IN TWO COMPANY PLANS
By Ian Berger, JD
Follow Us on Twitter: @theslottreport
Knowing your limits is important when you’re sitting in a bar and realize that you have to drive home. It’s also important to know the dollar limits that apply when you participate in more than one company retirement savings plan or you change jobs during the year.
Deferral limit. There are actually two limits at play. One is a limit on the amount of elective deferrals you are allowed to make in any calendar year. With one exception, the deferral limit is based on the total deferrals to all of your plans. So, this limit is usually a per person limit. The limit is indexed periodically and for 2019 is generally $19,000, or $25,000 if you’re age 50 or older as of the end of the calendar year.
Example: Amy, 42 years old, participates in Company A’s 401(k) plan and makes $12,000 in 401(k) deferrals before quitting in August to work for Company B. The most she can contribute to Company B’s 401(k) plan for the remainder of 2019 is $7,000.
There is one exception to this rule: If you’re eligible for both a 457(b) plan and a 403(b) plan, you can defer up to the maximum limit to each plan.
Exceeding the deferral limit can be double trouble – the excess amounts may be taxed both in the year they are contributed and in the year they are eventually paid out. To avoid this, you should monitor your deferrals closely and contact your plan administrator ASAP to have any excess amounts, plus earnings, distributed to you. That must happen by the following April 15 to avoid double taxation.
Annual additions limit. The second limit is the “annual additions” limit. This regulates the amount of total “annual additions” (elective deferrals, employer contributions and forfeitures) that can be contributed to any plan in any year. The annual additions limit applies to contributions made to all plans maintained by one company or by two or more companies considered related under the tax rules. But if you are in two plans sponsored by unrelated companies, a separate limit applies to each plan. This limit is also indexed and for 2019 is $56,000, or $62,000 if you’re age 50 or older.
Example: Ron, age 63, participates in two workplace plans (Plan A and Plan B) sponsored by two related companies. In 2019, he makes $25,000 of 401(k) deferrals to Plan A and receives a $9,000 matching contribution. If an employer contribution is made to Plan B participants for 2019, the contribution made to Ron would be limited to $28,000 ($62,000 -$34,000).
If your annual additions exceed the limit, it is up to the plan sponsor to fix the problem by notifying you and distributing excess amounts to you in the method required by the IRS.
Content Citation Guidelines
Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.
Please be advised that prior to distributing re-branded content, you must send a proof to firstname.lastname@example.org for approval.
For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.
For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
Please contact Matt Smith at email@example.com or (516) 536-8282 with any questions.