What Are the 402(g) and 415(c) Limits?
The IRS sets annual limits on how much an employee (plan participant) can contribute to a retirement plan each year.
- 402(g) limit: Maximum amount an employee can contribute from their own compensation.
- 415(c) limit: Maximum combined total of both employee and employer contributions.
Sometimes, employees exceed one of these limits. Fortunately, a distribution of the excess amount will correct either error.
Review Test
Review your testing results in the sponsor portal by logging in and navigating to My Plan > Annual Testing > Test Results.
Confirm that the following are accurate:
- Employee compensation and employee contribution data.
- Employer contributions.
The accuracy of compliance testing depends on the accuracy of this information. If you notice any discrepancies, please email us so we can update your records and, if necessary, revise the test. Revised testing due to data changes is billed at $250 per hour.
How to Correct a Failed 402(g) Test
If an employee exceeds the 402(g) deferral limit for the plan year, timing is key to avoid additional taxes or penalties.
- If the distribution occurs by April 15 following the plan year end: The excess deferrals must be distributed to the affected employee. These amounts are included in the employee’s gross income for the year of deferral. Earnings on the excess are taxed in the year they are distributed. The distribution is not subject to the 10% early withdrawal penalty.
- If the distribution occurs after April 15, following the plan year end: If excess deferrals are not withdrawn by the deadline, they are taxed twice — once in the year they were contributed and again when distributed from the plan. Excess contributions are also subject to a 6% annual tax for each year the excess remains in the plan.
Any 402(g) failures identified during the year-end compliance process will be flagged to you and can be remediated directly on the sponsor portal. Alternatively, if you notice a participant has contributed over the applicable limit or notifies you of an overage, let us know.
Note: The April 15 date is fixed and not tied to the employee’s tax filing deadline.
How to Correct a Failed 415(c) Test
If total contributions exceed the 415(c) annual limit:
- Distribute the excess amount to the affected employee. This amount will be included as taxable income, but not subject to the 10% early withdrawal penalty.
- Transfer unvested employer contributions (such as profit sharing or matching) to the plan suspense account. These amounts can be used to reduce employer contributions in the current or subsequent year(s).
Reporting Excess Deferrals to Employees
When correcting either 402(g) or 415(c) excesses, we will distribute the excess to the employee and report it as taxable in both:
- The year of deferral, and
- The year of distribution.
We will report these amounts on the Form 1099-R.
For Roth contributions, the excess amount was already included in income during the year of deferral, but the excess will still be reported as taxable in the year it’s distributed.
What to Do Going Forward
To prevent exceeding annual limits:
- Ensure all payroll data is accurately reported on the year-end census. This is especially important if your plan moved to us mid-year or you switched payroll companies.
- Review contribution elections regularly to ensure deferrals and employer contributions remain within annual IRS limits.
- Establish internal checks and balances to ensure the limits are not exceeded.
The information above is for general educational purposes. We are not a law firm or tax advisor, and each plan’s situation may vary. Plan sponsors should consult with their tax advisors to determine the best correction method for their specific circumstances.