Maximum Elective Deferrals

[Terry D EA]

This is a new area for me. After 20 years in this business I have never had a client who presented a W-2 that exceeded the minimum elective deferral amount. I questioned the client and they stated their HR department stated because of their age, (over 50) they were in catch contribution mode and were permitted to exceed the minimum of 18k. How do I prove this?? Is this something that will trigger a CP2000? Help please.

[Lee B]

If you talking about a 401k or a 403b, the max over 50 deferral is $24,000.

[Terry D EA]

That is exactly what I am talking about and Drake thru up a red message stating the elective deferral exceeded the 18K maximum amount.

[Margaret CPA in OH]

Do you have the taxpayer's age entered into the data for the return?

[Terry D EA]

Yes. if I didn't, I would get red flags all over the place.

[Terry D EA]

Just looked again, both taxpayer and spouse are 57 years old.

[jklcpa]

Terry, I'm not getting any error message when I enter more than 18K as the deferral. What code is your input associated with?

 

[Terry D EA]

Judy it is code D and the amount entered is $24,000.00. I had transmitted this return after the client verified they were allowed to defer this amount. Due to my lack of experience with this, I advised them the IRS may question this. Based on what others have said here that may not be the case. I just don't like those red messages.

[jklcpa]

I've tried both codes D and E with $24K and I'm not getting any red error message about it. The only message that is related to retirement at all is about amounts carried to the 8880, but nothing at all about exceeding the $18K limit.

You know that Drake's message page appears on the screen in all red type, but as long as the "message" page title at left (listed in the print section) isn't highlighted in red then it's not a problem, only something that might or might not require attention and is more informational than anything.

[Terry D EA]

The spouse's W-2 shows code E with 26,000 amount entered. She is also over 50

[Terry D EA]

Judy it is on the notes page now and not in the message. I don't think this is an error but a notification. What I don't understand is why am I getting that message and you are not.

[Tax Prep by Deb]

If the max deferral over 50 is 24,000 and hers is 26,000 then there does seem to be a problem.

[Terry D EA]

That was my thought but the message does not say which W-2. Again, she was advised by her HR department she is allowed the additional amount due to being able to catch up on the contributions again because of her age. Allowable catchup amounts are not indicated but the message does state it depends on the retirement plan that is in place.

[Tax Prep by Deb]

Just checked and the max is 18,000 under 50 and an addition 6,000 for over 50 so her HR Dept is wrong by 2,000 and that is what is triggering the error message and why it isn't with jklpc because 24,000 was used not the 26,000.  Your client contributed 2000 to much.

[jklcpa]

41 minutes ago, Terry D said:

That is exactly what I am talking about and Drake thru up a red message stating the elective deferral exceeded the 18K maximum amount.

So the message isn't because of being over $18K at all. As cbslee stated, the max including catch up is $24K and that is why you are receiving the error.  HR dept is wrong and your client has an excess deferral of $2K for 2016 that needs to be dealt with.

Edit to add - Deb & I were posting at the same time. I do get the error note when I input $26K

Edited February 25, 2017 by jklcpa
see notation of edit in post

[Terry D EA]

Thanks Judy and the others. I questioned the client and she was very adamant about the right to do so. I told her the additional amount would have to go to line 7 of the 1040. So, maybe not the  best move I have made lately, but I transmitted the return and it has been accepted so now the waiting game on the letter. I think I will also contact the client and insist that she amend the return at the end of the season.

[jklcpa]

Here's a summary page from IRS site that you could print out and give to her. It explains the limits and what happens with that excess, depending on the date it is withdrawn.
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits

[Terry D EA]

Thanks again Judy, I will review this with my client so she knows.

[grandmabee]

file the amended return BEFORE April 18th and then no additional I & P if paid by April 18th.

 

[Terry D EA]

Here is an excerpt from the article that Judy had posted that fits my client's situation. They are over 50 and do work in a hospital and have been employed for more than 15 years. So, as it stands, it appears my client has been advised properly. I originally posted this as a code "D" when in fact it was a code "E". When I read the entire article, there are differences with catchup contributions between plans. The last example fits my client's scenario perfectly. This has been good learning for me and I hope that posting the article will help others as well. I plan on forwarding this to my client for them to take to their HR department to be sure this is exactly what they are participating in.

Limit on employee elective salary deferrals

The limit on elective deferrals - the most an employee can contribute to a 403(b) account out of salary - is $18,000 in 2015 - 2017. Employees who are age 50 or over at the end of the calendar year can also make catch-up contributions of $6,000 in 2015 - 2017 beyond the basic limit on elective deferrals.

Limit on annual additions

The limit on annual additions (the combination of all employer contributions and employee elective deferrals to all 403(b) accounts) generally is the lesser of:

• • $54,000 for 2017 ($53,000 for 2015 and 2016), or
     
  • 100% of includible compensation for the employee's most recent year of service.

Generally, includible compensation is the amount of taxable wages and benefits the employee received in the employee's most recent full year of service. If your 403(b) plan doesn’t limit the total employer and employee contributions to the annual limits, find out how to correct this mistake.

Catch-ups for employees with 15-years of service

If permitted by the 403(b) plan, an employee who has at least 15 years of service with a public school system, hospital, home health service agency, health and welfare service agency, church, or convention or association of churches (or associated organization), has a 403(b) elective deferral limit that is increased by the lesser of:

1. 1. $3,000,
       
   2. $15,000, reduced by the amount of additional elective deferrals made in prior years because of this rule, or
       
   3. $5,000 times the number of the employee’s years of service for the organization, minus the total elective deferrals made for earlier years.

An employee who qualifies for the 15-year rule can have an elective deferral limit as high as $21,000 for 2016. For plans that offer “15-years of service catch-up” contributions, if an employee making these contributions doesn’t have the required 15 years of full-time service with the same employer, find out how to correct this mistake.

Catch-ups for employees age 50 or over

If permitted by the 403(b) plan, employees who are age 50 or over at the end of the calendar year can also make catch-up contributions of $6,000 in 2015 - 2017 beyond the basic limit on elective deferrals. If the 403(b) plan doesn’t have the age 50 catch-up and an employee made deferrals over the 402(g) limit (or the 402(g) limit  adjusted for a 15-year catch-up), find out how to correct this mistake.

If both catch-up provisions apply

While the age 50 catch-up is subject to an annual limit, the 15-year catch-up is subject to a use test, lifetime limit and an annual limit. When both catch-up opportunities are available, the law requires deferrals exceeding the standard limit ($18,000 in 2015 - 2017) to be first applied to the 15-year catch-up (to the extent permitted), and then to the age 50 catch-up.

Example: Assume Pat, age 50, has worked as a teacher in the XYZ School District for 15 years; is eligible for the 15 years of service catch-up; and has eligible compensation of $70,000 for 2016. The maximum employee and employer contributions to the XYZ 403(b) plan for 2016 for Pat would be $59,000:

• • Pat may have elective deferrals to the 403(b) plan totaling $21,000 ($18,000 plus $3,000 15 years of service catch-up)
  • Employer contribution of $32,000, bringing the total employee and employer contributions to $53,000, the annual additions limit.
  • Pat may also defer an additional $6,000 age 50 catch-up contribution in 2016.

Example: Now assume that Pat only deferred $22,000 of his salary under the 403(b) plan. The plan provides both the 15-year and age 50 catch-up deferral opportunities. Under the use test, Pat is eligible for a 15-year catch-up of $3,000. Of the total $22,000 deferred for 2016, the maximum standard deferral of $18,000 is first applied, followed by application of the 15-year catch-up deferral of $3,000, and finally application of the remaining $1,000 to the age 50 catch-up deferral.

[jklcpa]

Terry, thanks but you are giving me too much credit because none of that was on the page I linked to.  However you got to that page though and found the correct answer for your client is always welcome news. 

What is interesting is in Drake when I enter the $26K deferral with code E I get an informational note that may require attention but that will not stop the e-filing.

[Terry D EA]

Judy I had to click on the links at the bottom of the page you posted to get to this page. Had you not posted the first page I may not have found this. I too received the message in Drake but, as you said, it did not stop the e-filing. It is always a pleasure to work together on different situations. I guess I could have given up and went with the first answers received, but this bothered me enough that I had to know the right answer before contacting my client.

[Tax Prep by Deb]

1 hour ago, Terry D said:

Judy I had to click on the links at the bottom of the page you posted to get to this page. Had you not posted the first page I may not have found this. I too received the message in Drake but, as you said, it did not stop the e-filing. It is always a pleasure to work together on different situations. I guess I could have given up and went with the first answers received, but this bothered me enough that I had to know the right answer before contacting my client.

And in turn, we learn from your findings.  We all get one or two each year of a situation we haven't seen before, and therefore the comfort of coming here for help.  Now if this ever comes up we know the source and proper answer to the question.  So thanks for posting back what you found and having that strong desire not to just rely on this community, but digging a little deeper!  We all benefit from helping each other! 

I love my Community!