Non-Calendar Year Plan Limits

Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Illinois is representative of a common question on applying IRS limits to non-calendar year plans.

“How do the IRS contribution and other limits apply to non-calendar year plans?”

Highlights of the discussion

Applying the IRS retirement plan limits to calendar year plans is straightforward, but the analysis is trickier when dealing with non-calendar year plans. For businesses that run on a fiscal rather than calendar tax year, they may choose to run their plans on the same fiscal year. The following explains how to determine the Internal Revenue Code Sections (IRC §§) 402(g), 415, and annual compensation limits for non-calendar year plans to ensure that no limit has been exceeded.

402(g) Limit

The IRS’s limit on how much a participant can defer into a plan is always applied on a calendar year basis, regardless of whether the plan operates on a calendar year or non-calendar year basis. This means a participant in a non-calendar year plan will have two 402(g) limits to consider during a single plan year (i.e., the limit for the calendar year in which the plan year starts and the limit for the calendar year in which the plan year ends).

415 Limit

The 415 annual additions limit is the maximum amount that a participant can receive in a “limitation year” from all sources (i.e., deferrals, employer contributions and after-tax (nonRoth) contributions). For most defined contribution plans, the limitation year is the plan year, but a different 12-month period can be used. If the limitation year is not defined by a plan, then the calendar year must be used. In determining the 415 contribution limit to use for a non-calendar year plan, it is the 415 limit for the calendar year in which the plan year ends.

Annual Compensation Limit

A non-calendar plan year also affects the annual compensation limit for participants. Unlike the 415 limits, the annual compensation limit for a non-calendar plan year is based on the limit in effect for the calendar year in which the plan year begins.

Let’s put this all together in an example.

Samie Saver, who is under age 50, receives $400,000 in compensation and participates in her employer’s 401(k) plan. The plan has a plan year that runs from July 1, 2023, to June 30, 2024. The plan sponsor is trying to determine Samie’s annual compensation, 402(g) and 415 limits, but is having a hard time because everything he finds refers to calendar year plan limits. Luckily, the plan sponsor found this Case of the Week and knows what to do.

First, the plan sponsor recognizes that the maximum amount of compensation that can be used for deferrals and matching contributions is $330,000 because that was the limit for 2023, the year in which the plan year began. Second, the plan sponsor knows that the 415 limit that applies is $69,000 because that was the 415 limit for the calendar year in which the 2024 plan year ended.

Next, the plan sponsor tackles the 402(g) limit. Samie’s deferrals involve two different 402(g) limits, specifically, the limit for July 1, 2023, through December 31, 2023, and the limit for January 1, 2024, through June 30, 2024. The plan sponsor also must keep track of the amount of deferrals that Samie previously made for the January 1, 2023, through June 30, 2023, time period to ensure that she does not exceed the 402(g) limit for the calendar 2023 year.

Let’s assume that Samie deferred $10,000 from January 1, 2023, through June 30, 2023. This means that she could only defer $12,500 for the period of July 1, 2023, through December 31, 2023, without violating the 2023 402(g) limit of $22,500. However, she could defer up to $23,000 for the period of January 1, 2024, to June 30, 2024, assuming she chose to max out her deferrals in the beginning portion of the plan year, and not exceed the 402(g) limit. This means that the total deferrals for the 2024 non-calendar plan year are $35,500, but that’s ok because no 402(g) limit for a calendar year was exceeded.

If Samie defers a total of $35,500 for the 2024 plan year, as described above, then the employer matching contribution cannot exceed $33,500 without exceeding the 415 limit for 2024.

Conclusion

While the IRS retirement plan limits are easier to apply to calendar year plans, applying them to non-calendar year plans is made easier if you remember these rules and take the analysis step by step. The key is that plans sponsors and their recordkeepers have procedures in place to ensure that the 402(g) and other limits are properly tracked.