“However, I am confused as to how such a limit would ever come into play for a retirement plan, since it is so high. Can the Experts enlighten me?”
David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:
Good question! For most retirement plans, the 415(c) limit indeed does not come into play. It used to be a factor years ago (prior to 2002), but since that time, the limit was increased to the lesser of 100% (up from 25%) of compensation (as defined under Section 415) or the dollar limit ($54,000 in 2017). Most employees do not come close to the 100% of compensation limitation in most plans, so the 415(c) limit is generally moot.
However, for plans with large employer contributions and highly-paid employees, the limit can come into play. Let’s say someone is in a 403(b) plan and her 415 limit compensation is $250,000 in 2017. Her 415 limit would be the lesser of $250,000 (100% of my compensation, capped at the 401(a)(17) compensation limit of $270,000) or $54,000, which is $54,000. Let us further state that her plan has a 15% employer contribution for everyone—15% of $250,000 equals $37,500. If she tried to also contribute the maximum elective deferral of $18,000, she would exceed the 415 limit, since $37,500 plus $18,000 equals $55,500, which is greater than $54,000. Thus, she would only be permitted to defer $16,500 into her 403(b) plan, since $37,500 + $16,500 = $54,000.
It should also be noted that the age-50 catch-up does NOT count toward the 415 limit. Thus, in the example, the participant could make that extra $6,000 deferral (for a total of $22,500 in elective deferrals) without having to worry about the 415(c) limit, if she were age 50 or older as of 12/31/2017.
However, 15-year catch-up contributions do count toward the 415 limit, so they would not be an option in this scenario, even if she were eligible for the 15-year catch-up election.
Thank you for your question!
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to firstname.lastname@example.org with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.