The IRS places an overall limit on the total amount that may be added to a participant’s 401(k) within a single plan year by both the employer and the individual. This total limit is a combination of:
- The participant’s Pre-Tax/Traditional deferrals and after-tax “Roth” deferrals
- Employer contributions allocated to the account, and
- Any forfeitures reallocated to the account from the accounts of terminated participants who were not fully vested at the time they terminated.
This limit on these “Annual Additions'' is set forth in IRC Sec. 415. The 415 Annual Additions limit is equal to the lesser of 100% of the participant’s annual compensation (up to the limit on the compensation of $285,000 for 2020 or $290,000 for 2021) or an annually adjusted dollar amount. For 2020, the dollar amount was $57,000. For 2021, the dollar amount is $58,000. Each year the dollar amount is adjusted for changes in a cost-of-living index.
IRS Sec. 402(g) limits the maximum amount a participant may elect to defer in a single year. For both 2020 and 2021, that amount is $19,500. However, a participant who will reach age 50 by December 31, 2021, may make additional deferrals (or “catch-up contributions”) in 2021 up to $6,500. These catch-up contributions are not counted as an addition to the participant’s account and, therefore, do not count toward the $58,000 limit (or $57,000 in 2020). Please note that rollovers from another qualified plan are similarly excluded when determining total Annual Additions to the participant’s account.
You can view the current status of your plan’s compliance, including the 415 Annual Additions test and 402(g) Limit Test, by visiting your Guideline Compliance Dashboard. Please also refer to the provisions outlined under the "Annual Additions" section of your Plan Document.
Short Plan Year
If the plan has a short plan year, the limits will be prorated for the year.
For example, a new first-year plan is effective April 1, 2021. The plan has a plan year-end date of December 31. For the first year of the plan, the short plan year is April 1, 2021, to December 31, 2021. As such, 415 Annual Additions limit is prorated as $58,000 x (9/12) = $43,500.