Help Employees Plan Year-end 401(k) Deferrals

Now that the fourth quarter of 2023 is underway, remember to help your employees plan for their final 2023 401(k) deferrals to ensure that they do not exceed the 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) in the BA Guide.

Generally, compensation earned in 2023 but paid in 2024 is reported to the IRS for 2024. This would include a regular paycheck for a payroll period extending into the new year. For example, a 2023 bonus included in an employee’s regular paycheck in January 2024 should be reported as 2024 income. Any 401(k) deferrals made from that bonus check usually count toward the 2024 annual deferral limit.

Under IRS rules, an exception occurs when compensation is paid in 2024 to an employee who terminated in 2023. Any 401(k) deferrals from the terminated employee’s 2024 check count towards the 2023 limits (see below). Those deferrals are called trailing contributions and must be reported on your annual compliance questionnaire. When those deferrals are counted toward the 2023 limit as required, an over-deferral could result, leading to refunds for participants. Also, highly compensated employees may be subject to a limit that is lower than $22,500, based on your plan’s nondiscrimination test results. For these reasons, we recommend that you plan for large deferrals while processing an employee’s 2023 termination paperwork.

Employees who receive a large PTO or similar payout in early 2024 cannot exceed 2024 limits. The IRS usually releases limits for the upcoming calendar year around late October. Watch this publication and consult the Benefits & Contribution Limits page of the BA Guide for the 2024 limits.

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.