Limiting Compensation for Elective Deferral Purposes

“I work with a 403(b) ERISA plan sponsor. I realize that we must limit employer contributions to the first $290,000 of compensation in 2021 under the 401(a)(17) limit rules. However, do I need to cease elective deferrals when an employee reaches the 401(a)(17) limit, even if the participant has not reached the 402(g) ($19,500 in 2021) elective deferral limit?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

The Experts answer to this is actually an answer to a lot of questions we receive: It depends on what your plan document says!

We agree that you are required to limit employer contributions to 401(a)(17) limit compensation ($290,000 in 2021). However, the Code does not require you to similarly limit compensation for elective deferral purposes.

That said, we have seen plan documents that DO indeed require that salary deferrals cease once a participant’s compensation reaches the 401(a)(17) limit, often inadvertently applying the 401(a)(17) limit to compensation for ALL contribution types, Thus it is important to check your plan document in this regard, and amend it accordingly if it states that compensation for elective deferrals is limited to the 401(a)(17) limit and you do not wish to follow such a limit in actual plan operation. And, of course, if it is unclear as to what is stated in the plan document, you should contact whomever drafted the document and/or your outside ERISA counsel for clarification.

For more details on the application of the 401(a)(17) limit to retirement plans, check out this IRS webpage. Note that it references 401(k) plans, but it is applicable to 403(b) plans as well.

And, finally, of course, for plan changes such as this, you should always consult with an Employee Retirement Income Security Act (ERISA) attorney before proceeding.

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