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Issue 41167

Retirement Topics 401K Contribution limits

Project Statement:

Review the examples 1 and 2 shown on page 3 under the heading Overall Limit on Contributions, of the informational topic regarding 401(k) Profit-Share Plan Contribution Limits posted on the IRS website at https://www.irs.gov/retirement-plans/plan-participantemployee/retirement-topics-401k-and-profit-sharing-plancontribution-limits to determine if it is accurate and clearly explains the limitations.

Goal Statement:

The goal of this project is to review and make recommendations to the IRS that will enhance customer service, improve the taxpayers’ experience, and insure accurate information if being provided. Evaluation of the examples provided regarding 401(k) Profit-Sharing Plan Contributions Limits are correct and clearly explains the contributions limits.

TAP RECOMMENDATION

Recommended change on website for Compensation limits found at: https://www.irs.gov/retirement-plans/plan-participant-employee/ retirement-topics-401k-and-profit-sharing-plan-contribution-limits Informational topic on IRS website regarding 401(k) and Profit-Sharing Plan Contribution Limits on page 3, examples 1 and 2 and the paragraph entitled “Compensation limits for Contributions, found at: https://www.irs.gov/retirement-plans/plan-participant-employee/ retirement-topics-401k-and-profit-sharing-plan-contribution-limits Example 1: Greg, 46, is employed by an employer with a 401(k) plan, and he also works as an independent contractor for an unrelated business. Greg sets up a solo 401(k) plan for his independent contracting business. Greg contributes the maximum amount to his employer’s 401(k) plan for 2018, $18,500. Greg would also like to contribute the maximum amount to his solo 401 (k) plan. He is not able to make further elective deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $18,500. He has enough earned income from his business to contribute the overall maximum for the year, $55,000. Greg can make a nonelective contribution of $55,000 to his solo 401(k) plan. This $55,000 limit is not reduced by the elective deferrals Greg made under his employer’s plan because the limit on annual additions applies to each plan separately. Example 2: In Example 1, if Greg were 52 years old and eligible to make catch-up contributions, he could contribute an additional $6,000 of elective deferrals for 2018. His catch-up contribution could be split between the plans in any proportion he chooses. Or, Greg may contribute the full $6,000 catch-up contribution to his plan. This is because, although he made nonelective contribution to his solo 401(k) plan up to the maximum of $55,000, the $55,000 limit is not reduced by the elective deferral catch-up contributions.

Compensation limit for contributions

Remember that annual contributions to all of your accounts – this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts – may not exceed the lesser of 100% of your compensation or $56,000 for 2019 ($55,000 for 2018). In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. The compensation limitation is $280,000 in 2019 ($275,000 in 2018). Example 1: In 2018, Greg, 46, is employed by an employer with a 401(k) plan, and he also works as an independent contractor for an unrelated business. Greg sets up a solo 401(k) plan for his independent contracting business. Greg contributes the maximum elective deferral amount to his employer’s 401(k) plan for 2018, $18,500. Greg would also like to contribute the maximum amount to his solo 401(k) plan. He is not able to make further elective deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $18,500, to his employer’s plan. He has enough earned income from his business to contribute the overall maximum for the year, $55,000. Greg can make a nonelective contribution of $55,000 to his solo 401(k) plan. This $55,000 limit is not reduced by the elective deferrals Greg made under his employer’s plan because the limit on annual additions applies to each plan separately. Example 2: In Example 1, if Greg were 52 years old and eligible to make catch-up contributions, he could contribute an additional $6,000 of elective deferrals for 2018. His catch-up contribution could be split between the plans in any proportion he chooses. Or, Greg may contribute the full $6,000 catch-up contribution to his plan thereby making the total contribution to his plan $61,000. This is because, although he made nonelective contributions to his solo 401(k) plan up to the maximum of $55,000, the $55,000 limit is not reduced by the elective deferral catch-up contributions. Compensation limit for contributions Remember that annual contributions to all of your accounts maintained by one employer (and any related employer) – this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts, but not including catch-up contributions – may not exceed the lesser of 100% of your compensation or $56,000 for 2019 ($55,000 for 2018). This limit increases to $62,000 for 2019 ($61,000 for 2018) if you include catch-up contributions. In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. The compensation limitation is $280,000 in 2019 ($275,000 in 2018). Examples 1 and 2, coupled with the paragraph on compensation limits for contributions, are confusing with respect to how the catchup contributions affect the overall contribution limit. The added verbiage makes it clear that the overall contribution limit is increased by the amount of catch-up contributions. 11-15-2019 IRS RESPONSE: TE/GE C&L was already in the process of updating this page for the changes in the COLA numbers and did look at the examples. Please take a look at the page now and let me know if any further changes are needed. Thank you. https://www.irs.gov/retirement-plans/plan-participant-employee/ retirement-topics-401k-and-profit-sharing-plan-contribution-limits

IRS Action:TAP reviewing IRS response

IRS Initial Response:

TE/GE C&L was already in the process of updating this page for the changes in the COLA numbers and did look at the examples. Please take a look at the page now and let me know if any further changes are needed. Thank you. https://www.irs.gov/retirement-plans/plan-participant-employee/ retirement-topics-401k-and-profit-sharing-plan-contribution-limits 1-10=2020 IRS RESPONSE: We had already updated this page for 2019/2020 numbers. See the text below. It’s the current webpage with your changes (that haven’t been made yet) in red. Please review and let me know if this language is acceptable. Thanks. Example 1: In 2019, Greg, 46, is employed by an employer with a 401(k) plan, and he also works as an independent contractor for an unrelated business and sets up a solo 401(k). Greg contributes the maximum elective deferral amount to his employer’s 401(k) plan for 2019, $19,000. He would also like to contribute the maximum amount to his solo 401(k) plan. He is not able to make further elective deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $19,000, to his employer’s plan. He would also like to contribute the maximum amount to his solo 401(k) plan. Greg is not able to make further elective salary deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $19,000, to his employer’s plan. However, he has enough earned income from his business to contribute the overall maximum for the year, $56,000. Greg can make a nonelective contribution of $56,000 to his solo 401(k) plan. This $56,000 limit is not reduced by the elective deferrals Greg made under his employer’s plan because the limit on annual additions applies to each plan separately. Example 2: In Example 1, if Greg were 52 years old and eligible to make catch-up contributions, he could contribute an additional $6,000 of elective deferrals for 2019. His catch-up contribution could be split between the plans in any proportion he chooses. Or, Greg may contribute the full $6,000 catch-up contribution to his solo 401(k) plan, thereby making the total contribution to his plan $62,000. This is because, although he made nonelective contributions to his solo 401(k) plan up to the maximum of $56,000, the $56,000 limit is not reduced by the elective deferral catch-up contributions.

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