What is the annual additions limit?
Updated over a week ago

The annual addition limit is the total dollar amount that may be contributed to an employee’s retirement account (with the exemption of catch-up contributions) within a single plan year.

This total limit includes a combination of:

  1. The participant’s pre-tax/traditional deferrals and Roth deferrals

  2. Employer contributions allocated to the account

  3. Any forfeitures reallocated to the account (e.g., from the fully distributed accounts of terminated participants who were not fully vested at the time they terminated)

The annual additions limit is set forth in IRC Sec. 415.

Annual additions must equal to the lesser of:

  1. 100% of the participant’s annual compensation (after compensation limit is applied), or

  2. An annually adjusted dollar amount. For 2023, the dollar amount is $66,000 ($61,000 for 2022). Each year the dollar amount is adjusted by the IRS for changes in a cost-of-living index.

How the annual additions limit may cap total contributions

Say an employee earned $300,000 for 2023 and deferred the maximum deferrals of $22,500. The plan offers a 4% match (100% match on up to 4% of their salary), therefore, contributing $12,000 in matching contributions ($300,000 x .04).

The plan also decides to offer a very generous 20% profit-sharing contribution at the end of the year. While 20% of $300,000 is $60,000, the plan can only contribute $26,500 ($61,000 - ($22,500 + $12,000)) for this participant. Otherwise, total contributions would exceed the annual additions limit of $61,000.

What happens during a short plan year due to plan termination

If the plan has a short plan year because it is terminated, the dollar limit will be prorated based on the termination date for the year per IRS regulations.

For example, a calendar year plan is terminated effective September 30, 2023. The short plan year is January 1, 2023, to September 30, 2023. As such, the 415 annual additions limit is prorated as $66,000 x (9/12) = $49,500.

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