How much can workers contribute before it’s taxable?
The IRS recently released additional guidance on limits for employers’ defined contribution plans in certain confusing situations.
Here’s what Payroll needs to know.
Short limitation years
In most cases, the 2018 Sec 415 ( c) dollar limit for contributions to all of a participant’s defined contribution plans maintained by an employer is $55,000.
This includes elective deferrals, employee contributions, employer matching and nonelective contributions, and allocations of forfeitures. It doesn’t include catch-up contributions and certain restorative payments.
Dollar limits may be lower in short limitation years, depending on why the year’s been shortened.
If a plan is amended during the plan year, changing its effective date, a short limitation year begins on the first day of the current limitation year and ends on the day before the effective date of the new limitation year.
Short limitation years also happen if a plan is terminated before the las day of the plan’s limitation year.
In both cases, the contribution limit is prorated depending on how much time is left in the contribution year. Example: In a short limitation year lasting six months in 2018, the Maximum contribution limit would be $27,500.
However, if a short limitation year is due to an employee’s eligibility (i.e., and employee turns 50 late in the year), the full contribution limit applies.
With 401(k) plans in particular, there are more wrinkles to worry about with limits, especially when looking at catch-up contributions.
The limit for employee elective deferrals is $18,500 in 2018. Those who are 50 and older can make additional catch-up contributions to traditional 401 (k) of up to $6,000.
Catch-up contributions must be allowed by the terms of the plan, unless an employee participates in multiple employer-sponsored 401 (k)s.
In that case, the person can opt to treat certain deferral amounts as catch-up contributions. However, any excess deferrals must still be treated as taxable income.
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