3728 / How are Section 415 limits applied to defined contribution plans?

Annual additions include employee contributions, employer contributions, and forfeitures. The annual additions to a participant’s account (or all such accounts aggregated, if the employer has more than one defined contribution plan) must not exceed the lesser of 100 percent of the participant’s compensation or $70,000 (for 2025, $69,000 for 2024, $66,000 for 2023, $61,000 in 2022, $58,000 in 2021, $57,000 in 2020).¹ This limit is indexed for inflation in increments of $1,000.²

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Planning Point: When an HSA is available (see Q 393 for a discussion of the HSA eligibility rules), it can allow an individual to defer additional pre-tax amounts above the 401(k) contribution limits to the HSA, grow the HSA funds tax-free and, to the extent not used for valid healthcare expenses, eventually withdraw the amounts tax-free once the individual has reached age 65 (amounts used for valid healthcare expenses can always be withdrawn from the HSA tax-free). Moreover, Congress is discussing reducing the limits on the use of HSAs so that the option may become available to more individuals as a supplement to 401(k) deferrals for employees who are above the 401(k) limit.

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Limitations applicable when an individual is a participant in one or more elective deferral plans (including 401(k) plans, SIMPLE IRAs, SAR-SEPs, and tax sheltered annuities) are explained in Q 3760. For general rules affecting the application of the Section 415 limits, see Q 3868; for defined benefit plan limits, see Q 3719.The regulations referenced throughout this question were issued April 5, 2007 and are effective for limitation years beginning after June 30, 2007.³

The following amounts are not annual additions:

(1)  Catch-up contributions ( Q 3761)

(2)  Payments made to restore losses resulting from a breach of fiduciary duty

(3)  Excess deferrals that are distributed as required in regulations ( Q 3760)

(4)  Certain restorations of accrued benefits⁴

Earlier regulations provide for corrective measures when contributions in excess of the Section 415 limits (i.e., excess annual additions) are made due to the allocation of forfeitures, due to reasonable error in estimating a participant’s compensation, or under certain other limited circumstances.⁵ The preamble to the 2007 regulations states that guidance on this subject is in the Employee Plans Compliance Resolution System (EPCRS).⁶

Any amount allocated to a separate account that is required to be established in a welfare benefit fund ( Q 4103) to provide postretirement medical or life insurance benefits to a key employee ( Q 3931) must be treated as an annual addition to a separate defined contribution plan for purposes of calculating the annual additions to defined contribution plans of an employer.⁷ Such amounts are not subject to the 100 percent of compensation limit under IRC Section 415(c)(1)(B) discussed above.

While annual additions are the sum credited to a participant’s account for any limitation year, of (1) employer contributions, (2) employee contributions, and (3) forfeitures, “employee contributions” do not include rollovers from another qualified plan or from an IRA ( Q 3996), contributions under IRC Section 457(e)(6), or employee contributions to a SAR-SEP ( Q 3701) that are excludable from the employee’s gross income.⁸ A direct transfer of funds or employee contributions from one defined contribution plan to another will not be considered an annual addition for the limitation year in which the transfer occurs.⁹

A corrective allocation to a participant’s account because of an erroneous forfeiture or a failure to make a required allocation in a prior limitation year will not be considered an annual addition for the limitation year in which the allocation is made, but will be considered an annual addition for the limitation year to which the corrective allocation relates.¹⁰

Restorative payments made to a defined contribution plan, to the extent they restore plan losses that result from a fiduciary breach (or a reasonable risk of liability for a fiduciary breach), are not contributions for purposes of IRC Section 415(c). In contrast, payments made to a plan to make up for losses due to market fluctuations, but not due to a fiduciary breach, will be treated as contributions, not as restorative payments.¹¹

Earlier regulations stated that if an allocation of forfeitures or a reasonable error in estimating a participant’s annual compensation would cause additions to exceed the limit, they may, under certain circumstances, be held in suspense, be used to reduce employer contributions for that participant or be returned to the participant.¹² (A return of mandatory contributions could result in discrimination.) Certain other transactions between a plan and an employer, or certain allocations to participants’ accounts, could be treated as giving rise to annual additions.¹³

Generally, an employer may elect to continue contributions under a profit sharing or stock bonus plan on behalf of permanently and totally disabled participants.¹⁴ For the purpose of determining whether such contributions comply with the limitation on contributions, the disabled participant’s compensation is deemed to be the amount of compensation he would have received for the year if paid at the rate of compensation he received immediately before becoming permanently and totally disabled. Contributions made under this provision must be nonforfeitable when made.¹⁵ The IRS has privately ruled that a 401(k) plan that purchased a group long-term disability income policy to insure the continuation of benefit accumulation for disabled employees would not be required to include amounts paid under the policy as annual additions.¹⁶

A defined contribution plan may provide for an automatic adjustment which reflects the cost-of-living increases in the limit on annual additions.¹⁷ Like defined benefit plans, the plan may provide for automatic freezing or reduction in the rate of annual additions to prevent exceeding the limitation.¹⁸

In the case of an ESOP, if no more than one-third of the deductible employer contributions applied by the plan to the repayment of principal and interest on loans incurred to acquire qualifying employer securities are allocated to highly compensated employees ( Q 3930), forfeitures of employer securities acquired with such loans and deductible employer contributions applied by the plan to the payment of interest on such loans may be excluded for purposes of the limitations on contributions.¹⁹ Where an employer reversion is transferred to an ESOP, amounts in excess of the Section 415 limit which are held in a reversion suspense account are not deemed to be annual additions until the limitation year in which they are allocated to the participants’ accounts.²⁰