Help Employees Plan Year-End 401(k) Deferrals

As year-end approaches, help your employees plan for their final 2024 401(k) deferrals. Deferral planning helps participants to avoid exceeding the 2024 IRS §402(g) dollar limit.

Pay special attention to employees who retire or terminate at the end of the year. These individuals often elect to make large deferrals from their final paychecks (which can include bonuses, overtime, vacation, or PTO payouts). Monitoring the limit helps avoid excess deferral refunds. To guide you, NRECA has resources (with examples) on the 401(k) Reconciliation Tasks page of the BA Guide.

Typically, compensation earned in 2024 but paid in 2025 is reported to the IRS as 2025 income. This includes regular paychecks for payroll periods that extend into the new year. For example, if an employee’s January 2025 regular paycheck includes a bonus for 2024, the bonus is reported as 2025 income and a 401(k) deferral from that check counts toward the 2025 annual deferral limit.

However, IRS rules provide for an exception when the compensation paid in 2025 is for an employee who terminated in 2024. In that case, 401(k) deferrals from the terminated employee’s 2025 check count toward the 2024 limits. Deferrals like these are called trailing contributions, and they must be reported on your annual compliance questionnaire.

When a trailing contribution occurs, an over-deferral for 2024 could result, requiring an excess deferral refund for the participant. Depending on your plan’s nondiscrimination testing results, highly compensated employees may also be subject to a lower annual deferral limit. For these reasons, we recommend that you plan for large deferrals while processing an employee’s 2024 termination paperwork.

Similarly, employees who receive a large PTO payout or bonus in early 2025 cannot exceed 2025 limits. 2025 limits are available on the Benefits & Contribution Limits page of the BA Guide.

If you have questions about 401(k) deferral limits, planning deferrals for terminating employees, or compliance annual reporting, contact the benefits compliance team at 866.673.2299, option 7 or pension.compliance@nreca.coop.