taxmap/pubs/p560-016.htm#TXMP431f7dac
Elective Deferrals 
(401(k) Plans)(p15)

taxmap/pubs/p560-016.htm#TXMP3450b604
Note. For tax years beginning after December 31, 2005, a 401(k) plan may allow employees to contribute to a qualified Roth contribution program. For more details, see Qualified Roth Contribution Program, later.

taxmap/pubs/p560-016.htm#TXMP31db19b4 Automatic enrollment in a 401(k) plan.(p15)

Your 401(k) plan can have an automatic enrollment feature. Under this feature, you can automatically reduce an employee's pay by a fixed percentage and contribute that amount to the 401(k) plan on his or her behalf unless the employee affirmatively chooses not to have his or her pay reduced or chooses to have it reduced by a different percentage. These contributions qualify as elective deferrals. For more information about 401(k) plans with an automatic enrollment feature, see Regulations section 1.401(k)-1.

taxmap/pubs/p560-016.htm#TXMP6311e876 Partnership.(p15)

A partnership can have a 401(k) plan.

taxmap/pubs/p560-016.htm#TXMP6eaed160 Restriction on conditions of participation.(p15)

The plan cannot require, as a condition of participation, that an employee complete more than 1 year of service.

taxmap/pubs/p560-016.htm#TXMP09ca2cb3 Matching contributions.(p15)

If your plan permits, you can make matching contributions for an employee who makes an elective deferral to your 401(k) plan. For example, the plan might provide that you will contribute 50 cents for each dollar your participating employees choose to defer under your 401(k) plan.

taxmap/pubs/p560-016.htm#TXMP0f0c806a Nonelective contributions.(p15)

You can, under a qualified 401(k) plan, also make contributions (other than matching contributions) for your participating employees without giving them the choice to take cash instead.

taxmap/pubs/p560-016.htm#TXMP7d58f2e9 Employee compensation limit.(p15)

No more than $225,000 of the employee's compensation can be taken into account when figuring contributions.

taxmap/pubs/p560-016.htm#TXMP0d4540ca SIMPLE 401(k) plan.(p15)

If you had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year, you may be able to set up a SIMPLE 401(k) plan. A SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy plan requirements discussed later under Qualification Rules. For details about SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3

taxmap/pubs/p560-016.htm#TXMP211ba169 Limit on Elective Deferrals(p15)

Limit on Elective Deferrals

There is a limit on the amount an employee can defer each year under these plans. This limit applies without regard to community property laws. Your plan must provide that your employees cannot defer more than the limit that applies for a particular year. For 2007 and 2008, the basic limit on elective deferrals is $15,500 per year. If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income.

taxmap/pubs/p560-016.htm#TXMP6b8af19e Catch-up contributions.(p15)

A 401(k) plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit for 2007 and 2008 is $5,000 per year. Elective deferrals are not treated as catch-up contributions for 2007 until they exceed the $15,500 limit, the ADP test limit of section 401(k)(3), or the plan limit (if any). However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts.

• The catch-up contribution limit.
• The excess of the participant's compensation over the elective deferrals that are not catch-up contributions.

taxmap/pubs/p560-016.htm#TXMP2f830507 Treatment of contributions.(p15)

Your contributions to a 401(k) plan are generally deductible by you and tax free to participating employees until distributed from the plan. Participating employees have a nonforfeitable right to the accrued benefit resulting from these contributions. Deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax.

taxmap/pubs/p560-016.htm#TXMP48422bbe Reporting on Form W-2.(p15)

You must report the total amount deferred in boxes 3, 5, and 12 of your employee's Form W-2. See the Form W-2 instructions.

taxmap/pubs/p560-016.htm#TXMP5d34853f Treatment of  Excess Deferrals(p15)

Treatment of Excess Deferrals

If the total of an employee's deferrals is more than the limit for 2007, the employee can have the difference (called an excess deferral) paid out of any of the plans that permit these distributions. He or she must notify the plan by April 15, 2008 (or an earlier date specified in the plan), of the amount to be paid from each plan. The plan must then pay the employee that amount by April 15, 2008.

taxmap/pubs/p560-016.htm#TXMP3477f0b2 Excess withdrawn by April 15.(p15)

If the employee takes out the excess deferral by April 15, 2008, it is not reported again by including it in the employee's gross income for 2008. However, any income earned on the excess deferral taken out is taxable in the tax year in which it is taken out. The distribution is not subject to the additional 10% tax on early distributions.

If the employee takes out part of the excess deferral and the income on it, the distribution is treated as made proportionately from the excess deferral and the income.

Even if the employee takes out the excess deferral by April 15, the amount is considered contributed for satisfying (or not satisfying) the nondiscrimination requirements of the plan, unless the distributed amount is for a non-highly compensated employee who participates in only one employer's 401(k) plan or plans. See Contributions or benefits must not discriminate, later, under Qualification Rules.

taxmap/pubs/p560-016.htm#TXMP4b6ed60e Excess not withdrawn by April 15.(p15)

If the employee does not take out the excess deferral by April 15, 2008, the excess, though taxable in 2007, is not included in the employee's cost basis in figuring the taxable amount of any eventual benefits or distributions under the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan.

taxmap/pubs/p560-016.htm#TXMP64196bf0 Reporting corrective distributions on Form 1099-R.(p15)

Report corrective distributions of excess deferrals (including any earnings) on Form 1099-R. For specific information about reporting corrective distributions, see the Instructions for Forms 1099-R and 5498.

taxmap/pubs/p560-016.htm#TXMP32c50a17 Tax on excess contributions of highly compensated employees.(p15)

The law provides tests to detect discrimination in a plan. If tests, such as the actual deferral percentage test (ADP test) (see section 401(k)(3)) and the actual contribution percentage test (ACP test) (see section 401(m)(2)), show that contributions for highly compensated employees are more than the test limits for these contributions, the employer may have to pay a 10% excise tax. Report the tax on Form 5330. The ADP and ACP tests do not apply to safe harbor 401(k) plans.

The tax for the year is 10% of the excess contributions for the plan year ending in your tax year. Excess contributions are elective deferrals, employee contributions, or employer matching or nonelective contributions that are more than the amount permitted under the ADP test or the ACP test.

See Regulations sections 1.401(k)-2 and 1.401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m).

Previous Page:  Publication 560 - Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans) - Employer Deduction Next Page:  Publication 560 - Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans) - Qualified Roth Contribution Program Use   to find additional occurrences of topic items.