Making Sense of the 401(k) Multiple Plan Limits
By Ian Berger, JD
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We continue to get lots of questions about the company savings plan contribution limits. There are actually two different contribution limits – the “deferral limit” and the “overall limit.” This makes things very confusing, especially if you’re in multiple plans at the same time or you change jobs in the middle of the year.
Deferral limit. The deferral limit is based on the total pre-tax and Roth contributions you make to ALL your plans in one calendar year. Contributions to ALL plans are combined for the deferral limit – even if the plans are sponsored by companies that aren’t related under the tax rules. For 2021, the deferral limit is $19,500. However, if you’re age 50 or older by the end of the year, you can defer up to an additional $6,500 in “catch-up” deferrals, for a total of $26,000.
Example 1: Kyle, age 48, has a regular job with Acme Industries that sponsors a 401(k) plan and also has a solo 401(k) through a sole proprietorship. Acme and his sole proprietorship are not related entities. Kyle has already contributed $19,500 of elective deferrals to Acme’s plan in 2021. Even though the companies aren’t related, Kyle can’t make any elective deferrals to the solo because he’s already maxed out on the deferral limit through the Acme plan.
Non-Roth after-tax contributions (if allowed by the plan) do not count towards the $19,500/$26,000 deferral limit.
There is one instance where contributions to all plans are not aggregated: If you’re eligible for both a 457(b) plan and either a 401(k) or a 403(b) plan, you can defer up to the maximum deferral limit to EACH plan.
Overall limit. This limit (also known as the “annual additions limit” or “415 limit”) regulates the amount of ALL contributions (pre-tax deferrals, Roth contributions, after-tax contributions, and employer matching and profit sharing contributions) that can be made to ANY single plan in any year. For 2021, this limit is $58,000, or $64,500 if you make age 50-or-over catch-up contributions. [Note that 457(b) plans cannot take advantage of the overall limit; all contributions are limited to $19,500 or $26,000.]
Contributions made to all plans maintained by the same company are combined for the overall limit. And, contributions made by two or more companies related under the tax rules are also aggregated. But, if you are in two plans sponsored by unrelated companies, you get the benefit of a separate overall limit for each plan.
Note: For small employer plans [like solo 401(k) plans and SEPs], the rules are more complicated because of IRS deduction limits.
Example 2: Since Acme and Kyle’s sole proprietorship (from Example 1) are unrelated, there are separate overall limits for the Acme plan and his solo 401(k). Assuming Kyle receives a $4,500 employer match from the Acme plan, he could make up to $34,000 ($58,000 - $19,500 - $4,500) of after-tax contributions to the Acme plan. Although he can’t make any pre-tax deferrals or Roth contributions to his solo 401(k) because of the deferral limit, he could theoretically make up to $58,000 between after-tax and employer contributions to the solo plan.
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