How Do Statutory Limits Work for Non-Calendar Year Plans?

Q: I read your Ask the Experts column regarding Statutory Limits to Use for Non-Calendar Year Plans, but was confused as to whether a non-calendar year plan is required to use the plan year in limiting compensation to the 401(a)(17) limit, or could use a calendar year or other 12-month period to make this determination. Can the Experts clarify?

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

A: Certainly! For those who may not know, the 401(a)(17) limit is an indexed annual compensation limit ($345,000 in 2024) above which employer contributions may not be allocated and above which compensation is ignored for the purposes of certain nondiscrimination testing. Reg. 1.401(a)(17)-1(b)(3) describes the calculation period for the 401(a)(17) compensation limit as follows:

(3) Application of limit to a plan year —

(i) In general. For purposes of applying this paragraph (b), the annual compensation limit is applied to the compensation for the plan year on which allocations or benefit accruals are based.

(ii) Compensation for the plan year. If a plan determines compensation used in determining allocations or benefit accruals for a plan year based on compensation for the plan year, then the annual compensation limit that applies to the compensation for the plan year is the limit in effect for the calendar year in which the plan year begins. Alternatively, if a plan determines compensation used in determining allocations or benefit accruals for the plan year on the basis of compensation for a 12-consecutive-month period, or periods, ending no later than the last day of the plan year, then the annual compensation limit applies to compensation for each of those periods based on the annual compensation limit in effect for the respective calendar year in which each 12-month period begins.

Thus, though in general the plan year is used to calculate the 401(a)(17) limit, any 12-month period ending no later than the last day of the plan year can be used, which would include the calendar year that ends before the last day of the plan year. As a practical matter, however, most plans use the plan year to calculate the 401(a)(17) compensation limit using the dollar limit in effect for the calendar year in which the plan year begins, as described in our original Ask the Experts column.

For example, let’s say your plan has a July 1– to June 30 plan year. In determining the 401(a)(17) limit for the 2024 plan year, you could use the plan year or any 12-month period that ends prior to June 30, 2025, including the 2024 calendar year. If you use the 2024 plan year of July 1, 2024, to June 30, 2025, the 401(a)(17) compensation limit would be $345,000 since the dollar limit in effect for the 2024 calendar year (the calendar year in which the plan year begins) is $345,000.

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.

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