skip navigation

Search Help
Navigation Help

Tax Map Index
ABCDEFGHI
JKLMNOPQR
STUVWXYZ#

International
Tax Topic Index

Affordable Care Act
Tax Topic Index

Forms
Publications

Comments
About Tax Map

IRS.gov Website
Publication 560
taxmap/pubs/p560-017.htm#en_us_publink10008988

Elective Deferrals
(401(k) Plans)(p16)

For Use in Tax Year 2013
rule
Your qualified plan can include a cash or deferred arrangement under which participants can choose to have you contribute part of their before-tax compensation to the plan rather than receive the compensation in cash. A plan with this type of arrangement is popularly known as a "401(k) plan." (As a self-employed individual participating in the plan, you can contribute part of your before-tax net earnings from the business.) This contribution is called an "elective deferral" because participants choose (elect) to defer receipt of the money.
In general, a qualified plan can include a cash or deferred arrangement only if the qualified plan is one of the following plans.
taxmap/pubs/p560-017.htm#en_us_publink10008991

Partnership.(p16)

For Use in Tax Year 2013
rule
A partnership can have a 401(k) plan.
taxmap/pubs/p560-017.htm#en_us_publink10008992

Restriction on conditions of participation.(p16)

For Use in Tax Year 2013
rule
The plan cannot require, as a condition of participation, that an employee complete more than 1 year of service.
taxmap/pubs/p560-017.htm#en_us_publink10008993

Matching contributions.(p16)

For Use in Tax Year 2013
rule
If your plan permits, you can make matching contributions for an employee who makes an elective deferral to your 401(k) plan. For example, the plan might provide that you will contribute 50 cents for each dollar your participating employees choose to defer under your 401(k) plan. Matching contributions are generally subject to the ACP test discussed earlier under Employee Contributions.
taxmap/pubs/p560-017.htm#en_us_publink10008994

Nonelective contributions.(p16)

For Use in Tax Year 2013
rule
You can also make contributions (other than matching contributions) for your participating employees without giving them the choice to take cash instead. These are called nonelective contributions.
taxmap/pubs/p560-017.htm#en_us_publink10008995

Employee compensation limit.(p16)

For Use in Tax Year 2013
rule
No more than $255,000 of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2013. This limit is $260,000 in 2014.
taxmap/pubs/p560-017.htm#en_us_publink10008996

SIMPLE 401(k) plan.(p16)

For Use in Tax Year 2013
rule
If you had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year, you may be able to set up a SIMPLE 401(k) plan. A SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy plan requirements discussed earlier under Qualification Rules. For details about SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3.
taxmap/pubs/p560-017.htm#en_us_publink1000135957

Distributions.(p16)

For Use in Tax Year 2013
rule
Certain rules apply to distributions from 401(k) plans. See Distributions From 401(k) Plans, later.
taxmap/pubs/p560-017.htm#en_us_publink10008997

Limit on Elective Deferrals(p16)

For Use in Tax Year 2013
rule
There is a limit on the amount an employee can defer each year under these plans. This limit applies without regard to community property laws. Your plan must provide that your employees cannot defer more than the limit that applies for a particular year. For 2013 and 2014, the basic limit on elective deferrals is $17,500. This limit applies to all salary reduction contributions and elective deferrals. If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income.
taxmap/pubs/p560-017.htm#en_us_publink10008998

Catch-up contributions.(p16)

For Use in Tax Year 2013
rule
A 401(k) plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. The catch-up contribution limit for 2013 and 2014 is $5,500. Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the $17,500 limit, the actual deferral percentage (ADP) test limit of section 401(k)(3), or the plan limit (if any). However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts.
taxmap/pubs/p560-017.htm#en_us_publink10008999

Treatment of contributions.(p16)

For Use in Tax Year 2013
rule
Your contributions to your own 401(k) plan are generally deductible by you for the year they are contributed to the plan. Matching or nonelective contributions made to the plan are also deductible by you in the year of contribution. Your employees' elective deferrals other than designated Roth contributions are tax free until distributed from the plan. Elective deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax.
taxmap/pubs/p560-017.htm#en_us_publink10009000

Forfeiture.(p16)

For Use in Tax Year 2013
rule
Employees have a nonforfeitable right at all times to their accrued benefit attributable to elective deferrals.
taxmap/pubs/p560-017.htm#en_us_publink10009001

Reporting on Form W-2.(p16)

For Use in Tax Year 2013
rule
Do not include elective deferrals in the "Wages, tips, other compensation" box of Form W-2. You must, however, include them in the "Social security wages" and "Medicare wages and tips" boxes. You must also include them in box 12. Mark the "Retirement plan" checkbox in box 13. For more information, see the Form W-2 instructions.
taxmap/pubs/p560-017.htm#en_us_publink1000100239

Automatic Enrollment(p16)

For Use in Tax Year 2013
rule
Your 401(k) plan can have an automatic enrollment feature. Under this feature, you can automatically reduce an employee's pay by a fixed percentage and contribute that amount to the 401(k) plan on his or her behalf unless the employee affirmatively chooses not to have his or her pay reduced or chooses to have it reduced by a different percentage. These contributions are elective deferrals. An automatic enrollment feature will encourage employees' saving for retirement and will help your plan pass nondiscrimination testing (if applicable). For more information, see Publication 4674, Automatic Enrollment 401(k) Plans for Small Businesses.
taxmap/pubs/p560-017.htm#en_us_publink1000238967

Eligible automatic contribution arrangement.(p16)

For Use in Tax Year 2013
rule
Under an eligible automatic contribution arrangement (EACA), a participant is treated as having elected to have the employer make contributions in an amount equal to a uniform percentage of compensation. This automatic election will remain in place until the participant specifically elects not to have such deferral percentage made (or elects a different percentage). There is no required deferral percentage.
taxmap/pubs/p560-017.htm#en_us_publink1000238968
Withdrawals.(p17)
Under an EACA, you may allow participants to withdraw their automatic contributions to the plan if certain conditions are met.
If the plan allows withdrawals under the EACA, the amount of the withdrawal other than the amount of any designated Roth contributions must be included in the employee's gross income for the tax year in which the distribution is made. The additional 10% tax on early distributions will not apply to the distribution.
taxmap/pubs/p560-017.htm#en_us_publink1000238969
Notice requirement.(p17)
Under an EACA, employees must be given written notice of the terms of the EACA within a reasonable period of time before each plan year. The notice must be written in a manner calculated to be understood by the average employee and be sufficiently accurate and comprehensive in order to apprise the employee of his or her rights and obligations under the EACA. The notice must include an explanation of the employee's right to elect not to have elective contributions made on his or her behalf, or to elect a different percentage, and the employee must be given a reasonable period of time after receipt of the notice before the first elective contribution is made. The notice also must explain how contributions will be invested in the absence of an investment election by the employee.
taxmap/pubs/p560-017.htm#en_us_publink1000238970

Qualified automatic contribution arrangement.(p17)

For Use in Tax Year 2013
rule
A qualified automatic contribution arrangement (QACA) is a type of safe harbor plan. It contains an automatic enrollment feature, and mandatory employer contributions are required. If your plan includes a QACA, it will not be subject to the ADP test (discussed later) nor the top-heavy requirements (discussed earlier). Additionally, your plan will not be subject to the actual contribution percentage (ACP) test if certain additional requirements are met. Under a QACA, each employee who is eligible to participate in the plan will be treated as having elected to make elective deferral contributions equal to a certain default percentage of compensation. In order to not have default elective deferrals made, an employee must make an affirmative election specifying a deferral percentage (including zero, if desired). If an employee does not make an affirmative election, the default deferral percentage must meet the following conditions.
  1. It must be applied uniformly.
  2. It must not exceed 10%.
  3. It must be at least 3% in the first plan year it applies to an employee and through the end of the following year.
  4. It must increase to at least 4% in the following plan year.
  5. It must increase to at least 5% in the following plan year.
  6. It must increase to at least 6% in subsequent plan years.
taxmap/pubs/p560-017.htm#en_us_publink1000238971
Matching or nonelective contributions.(p17)
Under the terms of the QACA, you must make either matching or nonelective contributions according to the following terms.
  1. Matching contributions.You must make matching contributions on behalf of each non-highly compensated employee in the following amounts.
    1. An amount equal to 100% of elective deferrals, up to 1% of compensation.
    2. An amount equal to 50% of elective deferrals, from 1% up to 6% of compensation.
    Other formulas may be used as long as they are at least as favorable to non-highly compensated employees. The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees.
  2. Nonelective contributions.You must make nonelective contributions on behalf of every non-highly compensated employee eligible to participate in the plan, regardless of whether they elected to participate, in an amount equal to at least 3% of their compensation.
taxmap/pubs/p560-017.htm#en_us_publink1000238972
Vesting requirements.(p17)
All accrued benefits attributed to matching or nonelective contributions under the QACA must be 100% vested for all employees who complete 2 years of service. These contributions are subject to special withdrawal restrictions, discussed later.
taxmap/pubs/p560-017.htm#en_us_publink1000238973
Notice requirements.(p17)
Each employee eligible to participate in the QACA must receive written notice of their rights and obligations under the QACA, within a reasonable period before each plan year. The notice must be written in a manner calculated to be understood by the average employee, and it must be accurate and comprehensive. The notice must explain their right to elect not to have elective contributions made on their behalf, or to have contributions made at a different percentage than the default percentage. Additionally, the notice must explain how contributions will be invested in the absence of any investment election by the employee. The employee must have a reasonable period of time after receiving the notice to make such contribution and investment elections prior to the first contributions under the QACA.
taxmap/pubs/p560-017.htm#en_us_publink10009002

Treatment of
Excess Deferrals(p17)

For Use in Tax Year 2013
rule
If the total of an employee's deferrals is more than the limit for 2013, the employee can have the difference (called an excess deferral) paid out of any of the plans that permit these distributions. He or she must notify the plan by April 15, 2014 (or an earlier date specified in the plan), of the amount to be paid from each plan. The plan must then pay the employee that amount, plus earnings on the amount through the end of 2013, by April 15, 2014.
taxmap/pubs/p560-017.htm#en_us_publink10009003

Excess withdrawn by April 15.(p17)

For Use in Tax Year 2013
rule
If the employee takes out the excess deferral by April 15, 2014, it is not reported again by including it in the employee's gross income for 2014. However, any income earned in 2013 on the excess deferral taken out is taxable in the tax year in which it is taken out. The distribution is not subject to the additional 10% tax on early distributions.
If the employee takes out part of the excess deferral and the income on it, the distribution is treated as made proportionately from the excess deferral and the income.
Even if the employee takes out the excess deferral by April 15, the amount will be considered for purposes of nondiscrimination testing requirements of the plan, unless the distributed amount is for a non-highly compensated employee who participates in only one employer's 401(k) plan or plans.
taxmap/pubs/p560-017.htm#en_us_publink10009004

Excess not withdrawn by April 15.(p17)

For Use in Tax Year 2013
rule
If the employee does not take out the excess deferral by April 15, 2014, the excess, though taxable in 2013, is not included in the employee's cost basis in figuring the taxable amount of any eventual distributions under the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the employee's excess deferral is allowed to stay in the plan and the employee participates in no other employer's plan, the plan can be disqualified.
taxmap/pubs/p560-017.htm#en_us_publink10009005

Reporting corrective distributions on Form 1099-R.(p17)

For Use in Tax Year 2013
rule
Report corrective distributions of excess deferrals (including any earnings) on Form 1099-R. For specific information about reporting corrective distributions, see the Instructions for Forms 1099-R and 5498.
taxmap/pubs/p560-017.htm#en_us_publink10009006

Tax on excess contributions of highly compensated employees.(p17)

For Use in Tax Year 2013
rule
The law provides tests to detect discrimination in a plan. If tests, such as the actual deferral percentage test (ADP test) (see section 401(k)(3)) and the actual contribution percentage test (ACP test) (see section 401(m)(2)), show that contributions for highly compensated employees are more than the test limits for these contributions, the employer may have to pay a 10% excise tax. Report the tax on Form 5330. The ADP test does not apply to a safe harbor 401(k) plan (discussed next) nor to a QACA. Also, the ACP test does not apply to these plans if certain additional requirements are met.
The tax for the year is 10% of the excess contributions for the plan year ending in your tax year. Excess contributions are elective deferrals, employee contributions, or employer matching or nonelective contributions that are more than the amount permitted under the ADP test or the ACP test.
See Regulations sections 1.401(k)-2 and 1.401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m).
EIC
If the plan fails the ADP or ACP testing, and the failure is not corrected by the end of the next plan year, the plan can be disqualified.
taxmap/pubs/p560-017.htm#en_us_publink10009007

Safe harbor 401(k) plan.(p17)

For Use in Tax Year 2013
rule
If you meet the requirements for a safe harbor 401(k) plan, you do not have to satisfy the ADP test, nor the ACP test, if certain additional requirements are met. For your plan to be a safe harbor plan, you must meet the following conditions.
  1. Matching or nonelective contributions. You must make matching or nonelective contributions according to one of the following formulas.
    1. Matching contributions. You must make matching contributions according to the following rules.
      1. You must contribute an amount equal to 100% of each non-highly compensated employee's elective deferrals, up to 3% of compensation.
      2. You must contribute an amount equal to 50% of each non-highly compensated employee's elective deferrals, from 3% up to 5% of compensation.
      3. The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees.
    2. Nonelective contributions. You must make nonelective contributions, without regard to whether the employee made elective deferrals, on behalf of all non-highly compensated employees eligible to participate in the plan, equal to at least 3% of the employee's compensation.
    These mandatory matching and nonelective contributions must be immediately 100% vested and are subject to special withdrawal restrictions.
  2. Notice requirement. You must give eligible employees written notice of their rights and obligations with regard to contributions under the plan, within a reasonable period before the plan year.
The other requirements for a 401(k) plan, including withdrawal and vesting rules, must also be met for your plan to qualify as a safe harbor 401(k) plan.