Internal Revenue Code Section (IRC) 415 provision sets limits on the amount an employer can contribute to an individual’s retirement plan. We’ll explain how the 415 Retirement Plan deadline affects your business, compliance, and how to avoid going over the limits in this handy guide.
What is the Internal Revenue Code Section 415?
The IRC Section 415 is a federal provision limiting the amount an individual can receive for their retirement benefits from a qualified pension plan. The provision was implemented to prevent employers from using benefit plans as tax shelters.
Section 415 can be broken into several subcategories that establish different limitations depending on the type of pension or qualified plan. These limitations can affect contribution amounts, cost-of-living adjustments, or any special rules that may apply to an individual’s retirement plan contribution.
You’ll want to consult with a tax expert to navigate staying within these limitations and managing your employee contributions to ensure they are compliant with Section 415. Tax Hack specializes in helping businesses manage Section 415 compliance and can offer strategies to keep your contributions within the limits.
What are the IRC 415(c) limits?
The annual limits for contributing to a retirement plan include:
- Salary Deferrals: An employee can contribute $20,500 in 2022 annually.
- Annual Compensation: The compensation limit is $305,000 in 2022.
- Total Employee and Employer Contribution: Must be the lesser value between 100% of an employee’s compensation or $61,000 for 2022.
Retirement Plan Contribution Types
The types of contributions that the IRC 415(c) applies to:
- Elective contributions made to 401(k) and salary reduction SEP plans
- Employer matching contributions
- After-tax employee contributions
- Employer profit-sharing contributions
- Other employer contributions
Employers need to be very careful that the total contributions do not exceed $61,000 or 100% of the employee’s compensation.
Total Annual Benefit Limit
The total annual benefit limit (based on a calendar year) for retirees that are 62 years old or older is 245,000 for 2022. The dollar limit amount is adjusted based on:
- The portion of the benefit amount that comes from the employer contributions
- Picked-up employee contributions can not exceed the dollar amount from 2021.
There are some limitation adjustments for individuals who retire before age 62 and if:
- The retiree is a firefighter or police officer with fifteen years plus of service.
- The annual retirement benefit is for a survivor’s annuity, payable from a pre-retirement death.
- The annual benefit for disability retirement.
There are exceptions for employees older than 50 who are trying to catch up on their total contribution to their retirement plan.
What is the IRC 415 Employer Contribution Deadline?
Businesses must make all employer contributions to retirement plans by the income tax return deadline or the extended deadline, which typically falls on April 15th and October 15th, respectively.
This also applies to self-employed individuals that want to make an “employer” contribution to their retirement plan.
How to Prevent Going Over the Total Annual Contribution Limit
To avoid going over the annual contribution limit, you can do several things to stay within the limits:
Create Allocation Schedules
Your retirement plan administrator should create allocation schedules for:
- Employee contributions
- Employer contributions
- Forfeiture allocations
Monitor Employee Elective Contributions
The administrator needs to actively monitor all employee elective contributions during the year to ensure the limit isn’t exceeded. You’ll want to consult with tax experts who can offer management strategies for ensuring your employee contributions stay within the limits. This may mean setting up monthly or quarterly reviews to evaluate each employee’s contribution.
Consider IRC 415 Limits When Setting Company Policy
After determining the company matching contribution, the administrator should consider the IRC 415 limits when determining:
- Discretionary profit-sharing contribution amounts
- How the profit-sharing contributions will be allocated during the plan years.
Consult with Tax Experts
You should consult with tax experts to ensure your contribution plans, schedules, and monitoring system are accurate and strategically optimized for tax efficiency.
By actively planning, monitoring, and assessing total contributions in relation to the IRC 415 limits, your business can maximize employee benefits while avoiding IRS scrutiny.
What Should You Do If the Contributions Exceed the IRC Section 415(c) Limits
If the employee and employer contributions exceed the IRC 415(c) limits, here is how you can correct the problem:
- Distribute unmatched elective contributions to the affected employee. If there is still an excess of the limit, do the next steps.
- Distribute elective contributions that are matched.
- Forfeit-related matching contributions.
- Forfeit any other profit-sharing contributions.
You’ll need to submit Form 1099-R to the affected employee. They will need to include the distribution as income but will not have to pay the 10% on early distributions. The distribution may not be rolled over the corrected distribution to another qualified retirement plan or to an IRA.
Avoid IRS Issues with an Experienced Tax Firm
Tax Hack Accounting specializes in strategic tax planning for startups and enterprise businesses.
Our experienced tax pros understand the challenges businesses face when setting retirement contribution policies, and they can help your stay compliant while maximizing employee benefits.
Get started today with a one-on-one strategy session with a Tax Hack pro.