401(k) plans must limit the elective deferrals that participants contribute to their account each calendar year by the 402(g) limit. Meeting the limit is critical. Violations may lead to steep IRS penalties for both employers and employees if not corrected timely.
This trouble is usually easy to avoid. In general, the 402(g) limit is straightforward. When it’s not, a skilled 401(k) provider will know how to account for the complicating factors.
We get a lot of questions from employers about the 402(g) limit. Below is a FAQ with answers to the most common questions.
What is the 402(g) Limit?
IRC Section 402(g) limits the amount of elective deferrals an individual can contribute to their retirement account each calendar year. Elective deferrals include both pre-tax salary deductions and designated Roth contributions.
The 402(g) limit is subject to annual cost-of-living increases. For the 2023 calendar year, the 402(g) limit is $22,500.
Are Catch-Up Contributions Subject to the 402(g) Limit?
The separate limit means a catch-up eligible individual can contribute elective deferrals up to $30,000 ($22,500 (402(g) limit) + $7,500 (catch-up)) in 2023.
Which Retirement Plans Are Subject to the 402(g) Limit?
The 402(g) limit applies to elective deferrals made to the following retirement plans:
How is a 402(g) Violation Corrected?
Elective deferrals that exceed the 402(g) limit are called “excess deferrals.” Excess deferrals must be distributed to the individual to correct a 402(g) violation. The excess amount must be adjusted for earnings through the last day of the year.
What is the Deadline for Distributing Excess Deferrals?
The deadline for distributing excess deferrals without penalty is the April 15 following the calendar year of deferral. The retirement plan's year-end is irrelevant for purposes of the April 15 deadline.
What are the Consequences of a 402(g) Violation for Individuals?
The 402(g) limit is technically an individual taxpayer limit, not a plan one. If excess deferrals are distributed on or before the April 15 deadline, the following taxation rules will apply to the individual:
- The amount attributable to pre-tax deferrals is taxable income in the year of deferral.
- The amount attributable to Roth contributions is taxable income in the year of distribution.
- The amount attributable to earnings is taxable income in the year of distribution.
- No 10% early distribution tax applies.
- No 20% withholding or spousal consent is required.
If excess deferrals are distributed after the April 15 deadline, the amount attributable to pre-tax deferrals will be taxable income again in the year of distribution. In other words, the income is double-taxed.
What are the Consequences of a 402(g) Violation for Plans?
While the 402(g) limit is an individual limit, it can still affect a 401(k) plan’s qualified status. IRC Section 401(a)(30) requires a 401(k) plan to limit deferrals to the 402(g) limit. 401(k) plans that distribute excess deferrals on or before the April 15 deadline have no problem.
401(k) plans that miss the April 15 deadline must distribute the excess deferral to the individual and report the non-Roth amount as taxable both in the year of deferral and in the year distributed. Failure to correct the violation at all could lead to significant IRS penalties, up to plan disqualification.
Excess deferrals of Highly Compensated Employees (HCEs) must be included in the Actual Deferral Percentage (ADP) nondiscrimination test, while excess deferrals of non-HCEs do not. This 402(g) requirement makes the ADP test harder for a plan to pass.
Excess deferrals distributed after April 15 are considered annual additions for purposes of the 415 test in the year of deferral.
How Does the 402(g) Limit Apply to Multiple Plans?
In general, individuals must aggregate all the elective deferrals they made to any plan during the year. For example, if an individual made elective deferrals to a 401(k) and a 403(b) plan in 2023, their 402(g) limit would still be $22,500, not $45,000 ($22,500 per plan).
How is a 402(g) Violation That Spans Multiple Plans Corrected?
When an individual makes elective deferrals to multiple plans that, when combined, exceed the 402(g) limit, the excess amount must be distributed from one or more of the plans. It will be up to the individual to initiate the necessary corrective distribution prior to the April 15 deadline.
Staying Out of Trouble is Easy with the Right Help!
The 402(g) limit may be the most straightforward 401(k) contribution limit. However, it can get complicated fast when an individual makes elective deferrals to multiple retirement plans during the same calendar year.
The good news? A skilled 401(k) provider will know how to account for these complicating factors – making it easy for employers and employees to stay out of trouble.