How Do 402(g) Limit Calculations Work in Non-Calendar-Year Plans?

Q: I have been reading your Ask the Experts column on statutory limits for non-calendar-year plans with great interest, as I work with a 403(b) plan that has a non-calendar plan year as well. Is there any workaround for having to calculate two separate 402(g) limits for non-calendar-year plans each plan year? Calculating these limits is quite cumbersome.

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Unfortunately, no. The requirement for 402(g) elective deferral limits to be calculated on a calendar-year basis, regardless of whether or not the plan year is calendar, is a statutory requirement that cannot be modified. The reason for this is that the 402(g) limit is an individual limit, NOT plan-specific; it aggregates all elective deferrals to 403(b) and 401(k) plans across all plans and employers of the participant in a calendar year.

For example, let’s say your 403(b) plan has a July 1 to June 30 plan year, and you hire a new employee on August 1, 2024. The employee is not yet age 50 as of the end of 2024 but already deferred $23,000 to her prior employer’s 401(k) plan in 2024. Since $23,000 is the general 402(g) limit for 2024, even though that employee has yet to defer even a dollar to your plan, she won’t be able to defer anything to your plan for the remainder of the first half of the 2024 plan year. The employee may commence deferrals halfway through the 2024 plan year, on January 1, 2025, and may defer up to the 402(g) limit for that calendar year (a limit that we do not know as yet).

Of course, this and other limit calculation complexities can be avoided by switching to a calendar plan year, though there may be non-plan reasons for your current plan year. You can contact your plan’s retirement plan counsel to discuss the advantages and disadvantages of switching to a calendar plan year for your particular plan.

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 Amy.Resnick@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.