Specialized Returns and Taxpayers · Retirement plans

Employer and employee contributions

An employee’s deferral limit and the plan’s annual additions limit are different numbers governed by different sections, and the difference between them is not a technicality — it is what makes an employer match possible at all. The deferral limit belongs to the person. The annual additions limit belongs to the account.

The rule

The individual’s deferral limit. IRC § 402(g)(1)(A) includes an individual’s elective deferrals in gross income to the extent they exceed the applicable dollar amount — except to the extent of the individual’s designated Roth contributions for the year — and the statutory applicable dollar amount at IRC § 402(g)(1)(B) is $15,000, indexed^TY2026 the IRC § 402(g)(1) limitation on the exclusion for elective deferrals, which includes deferrals to the Thrift Savings Plan, is $24,500 for 2026, up from $23,500 for 2025; the IRC § 457(e)(15) limit on deferrals under a governmental or tax-exempt deferred compensation plan is the same $24,500^TY2026 This limit is the individual’s, not the plan’s. Someone who works for two unrelated employers in the same year and defers into both plans has one limit between them, and neither plan can police it — only the individual can.

Fixing an excess. an individual with excess deferrals may allocate them among the plans by the following 1 March and each plan may distribute the allocated amount, with allocable income, by the following 15 April; the returned excess is not included in gross income again, but the income on it is treated as earned and received in the year of distribution (IRC § 402(g)(2))^TY2026 The 15 April date is not the filing deadline in disguise; it is a hard statutory date, and an extension of time to file does not move it.

The account’s limit. the IRC § 415(c)(1) limit on annual additions to a defined contribution account is the lesser of the dollar limit or 100 percent of the participant’s compensation, the annual addition being the sum of employer contributions, employee contributions and forfeitures, determined without regard to rollover contributions (IRC § 415(c)(1), (2))^TY2026 the IRC § 415(c)(1)(A) dollar limitation for defined contribution plans is $72,000 for 2026, up from $70,000 for 2025; the statutory figure in the Code is $40,000, indexed^TY2026 Note what the annual addition includes: elective deferrals, employer contributions of every kind, employee after-tax contributions and forfeitures reallocated to the account. Note what it excludes: rollovers, and — by design — catch-up contributions.

Defined benefit plans measure the benefit, not the contribution. the IRC § 415(b)(1)(A) limitation on the annual benefit under a defined benefit plan is $290,000 for 2026, up from $280,000 for 2025^TY2026

Catch-ups sit outside both limits. the IRC § 414(v)(2)(B)(i) catch-up limit for an applicable employer plan other than a SIMPLE arrangement, for individuals aged 50 or over, is $8,000 for 2026, up from $7,500; the IRC § 414(v)(2)(E)(i) higher catch-up for individuals who attain age 60, 61, 62 or 63 in 2026 remains $11,250^TY2026 the IRC § 414(v)(2)(B)(ii) catch-up limit for a SIMPLE 401(k) or SIMPLE IRA, for individuals aged 50 or over, is $4,000 for 2026, up from $3,500; the IRC § 414(v)(2)(E)(ii) age 60 to 63 catch-up for those plans remains $5,250 and the IRC § 414(v)(2)(B)(iii) limit for certain such accounts remains $3,850^TY2026 a catch-up contribution may not exceed the lesser of the applicable dollar amount or the excess of the participant’s IRC § 415(c)(3) compensation for the year over the participant’s other elective deferrals for the year (IRC § 414(v)(2)(A))^TY2026 A participant aged 50 or over may therefore reach the deferral limit and the catch-up on top, and the annual additions limit is applied without regard to the catch-up.

And some catch-ups must be Roth (IRC § 414(v)(7)). where an eligible participant’s IRC § 3121(a) wages from the sponsoring employer for the preceding calendar year exceed the threshold, catch-up contributions are permitted only if designated as Roth contributions, and the plan must offer every eligible participant the Roth option; the threshold, indexed from the quarter beginning 1 July 2023 and rounded down to a multiple of $5,000, is $150,000 of 2025 wages for 2026 catch-ups, up from $145,000 (IRC § 414(v)(7))^TY2026 The threshold looks at the prior calendar year’s wages from the sponsoring employer, so a participant’s first year with a new employer is never caught by it.

Compensation is capped before any of this is computed. the annual compensation limitation under IRC §§ 401(a)(17), 404(l), 408(k)(3)(C) and 408(k)(6)(D)(ii) is $360,000 for 2026, up from $350,000; for eligible participants in certain governmental plans grandfathered under the plan as in effect on 1 July 1993 it is $535,000, up from $520,000^TY2026 A plan that promises a percentage of pay cannot count compensation above the cap in the formula, which is what keeps the IRC § 415(c) limit binding on high earners.

Two more thresholds that drive plan design. the threshold in the definition of highly compensated employee under IRC § 414(q)(1)(B) remains $160,000 for 2026, and the IRC § 416(i)(1)(A)(i) threshold for a key employee for top-heavy purposes is $235,000, up from $230,000^TY2026 the IRC § 408(k)(2)(C) compensation threshold for participation in a simplified employee pension is $800 for 2026, up from $750^TY2026

What the employer may deduct. an employer’s deduction for contributions to a stock bonus or profit-sharing trust is limited to the greater of 25 percent of the compensation otherwise paid or accrued during the taxable year to the plan’s beneficiaries, or the amount the employer is required to contribute under IRC § 401(k)(11); an excess carries over and is deductible in later years subject to the same ceiling (IRC § 404(a)(3)(A))^TY2026 The deduction limit and the IRC § 415(c) limit are separate constraints, and it is possible to be inside one and outside the other. a contribution is deemed made on the last day of the preceding taxable year if it is on account of that year and is made not later than the time prescribed by law for filing the return for that year, including extensions (IRC § 404(a)(6))^TY2026 a 10 percent excise tax is imposed on the nondeductible contributions to a qualified employer plan, determined as of the close of the employer’s taxable year, and is paid by the employer that made them (IRC § 4972(a), (b))^TY2026

Self-employed compensation is different. for a self-employed individual within the meaning of IRC § 401(c)(1), the participant’s compensation for the IRC § 415(c) limit is earned income within the meaning of IRC § 401(c)(2), determined without regard to any IRC § 911 exclusion (IRC § 415(c)(3)(B))^TY2026

Individual retirement contributions run on their own scale. the IRC § 219(b)(5)(A) deductible amount for an individual’s qualified retirement contributions is $7,500 for 2026, up from $7,000, and the IRC § 219(b)(5)(B)(ii) additional amount for individuals aged 50 or over before the close of the taxable year is $1,100, up from $1,000^TY2026

A newer account inside the plan. the IRC § 402A(e)(3)(A)(i) limit on a pension-linked emergency savings account that may be included in certain defined contribution plans is $2,600 for 2026, up from $2,500^TY2026

Current figures

How it works in practice

Ask which limit the question is about before doing any arithmetic. If the facts involve one person and more than one plan, it is the deferral limit and the answer aggregates. If the facts involve one plan and more than one kind of contribution — deferrals, match, profit sharing, forfeitures — it is the annual additions limit and the answer aggregates differently. Almost every wrong answer in this area comes from applying one limit to the other’s facts.

For the annual additions limit, remember that it applies per employer, or more precisely per employer that is not aggregated under IRC § 414(b), (c), (m) or (o). Two genuinely unrelated employers each have their own annual additions limit for the same participant, while a controlled group has one. That is why the multiple-employer fact pattern always turns on whether the employers are related — and if they are, the whole question changes.

When an excess deferral surfaces, act on the calendar rather than the return. The participant allocates by 1 March and the plan distributes by 15 April. Miss it and the excess is taxed twice: once in the year deferred and again when eventually distributed, with no basis recovery. That outcome is entirely avoidable and entirely unforgiving.

On the employer side, check the deduction ceiling against the actual contribution before the return is filed, because the contribution can still be made up to the extended due date and counted for the prior year under IRC § 404(a)(6). An employer that over-contributes owes the IRC § 4972 excise tax every year the excess remains in the plan, not merely in the year it went in.

How this has changed

The age 60 to 63 “super catch-up” at IRC § 414(v)(2)(E) came from the SECURE 2.0 Act, Division T of Pub. L. 117-328, enacted 29 December 2022, and first applied for taxable years beginning after 31 December 2024. It is a higher catch-up for exactly four ages and reverts to the ordinary catch-up at 64.

The Roth catch-up requirement at IRC § 414(v)(7) came from the same Act and was originally to apply from 2024. Its effective date was administratively deferred, and for 2026 it is live at the indexed wage threshold set out above. The drafting error in SECURE 2.0 that appeared to delete the catch-up provision altogether was resolved administratively rather than by amendment.

Pension-linked emergency savings accounts at IRC § 402A(e) are also a SECURE 2.0 creation, available for plan years beginning after 31 December 2023. They sit inside a defined contribution plan, are funded with Roth contributions, and are capped well below the ordinary deferral limit.

The compensation cap has moved substantially in recent years, and the annual additions limit with it. Any worked example carried forward from a prior year’s material will be wrong on both, which matters because the two interact in every profit-sharing computation.

Exam focus

The deferral limit against the annual additions limit is the whole topic. Know which one aggregates across employers, know that catch-ups are outside the annual additions test, and know that the compensation cap is applied inside the formula.

Know the 2026 numbers: the deferral limit, the annual additions limit, the ordinary catch-up, the SIMPLE catch-up, the compensation cap and the IRA limit. Know that the highly compensated employee threshold did not move for 2026 while the key employee threshold did.

Know the excess deferral timetable — allocate by 1 March, distribute by 15 April — and the consequence of missing it. Know that the employer deduction ceiling for a profit-sharing plan is 25 percent of covered compensation and that an excess contribution draws the IRC § 4972 excise tax.

Check yourself

1. A participant aged 52 defers $24,500 and her employer contributes a $15,000 profit share. She also makes an $8,000 catch-up. Her compensation is $200,000. Is the IRC § 415(c) limit breached?

Answer: No. Annual additions are $24,500 plus $15,000, or $39,500, against a limit of the lesser of $72,000 or 100 percent of compensation. The $8,000 catch-up is excluded from the annual additions computation by IRC § 414(v), so it does not enter the test at all. Adding it in to reach $47,500 would still be under the limit here, but the principle is what the question is testing.

2. A partner in a law firm has self-employment earnings of $600,000 and no W-2 wages. She is 56 and wants to make a catch-up contribution to the firm’s 401(k) on a pre-tax basis in 2026. May she?

Answer: Yes. IRC § 414(v)(7)(A) applies only where the participant’s IRC § 3121(a) wages from the sponsoring employer for the preceding calendar year exceed the threshold. Self-employment earnings are not wages under IRC § 3121(a), so a partner with no W-2 from the firm has no prior-year wages to measure and the Roth requirement does not reach her, however large her earnings.

3. An employer with a profit-sharing plan pays $1,200,000 of compensation to plan participants and contributes $340,000 for the year. What is the consequence?

Answer: The IRC § 404(a)(3)(A)(i) ceiling is 25 percent of $1,200,000, or $300,000, so $40,000 is nondeductible this year. It carries over and is deductible in later years subject to the same ceiling, and meanwhile the employer owes the IRC § 4972 excise tax of 10 percent of the nondeductible amount, determined as of the close of each taxable year it remains.

4. An employee defers $12,000 into a SIMPLE IRA at one employer and $14,000 into a 401(k) at another unrelated employer. She is 45. Is there a problem?

Answer: Yes. IRC § 402(g) aggregates elective deferrals across all plans and all employers, and $26,000 exceeds the $24,500 limit by $1,500. That the SIMPLE has a lower plan-level limit of $17,000 is irrelevant to the aggregate test — she was inside each plan’s own limit and outside her own. She must allocate the excess by 1 March and have it distributed by 15 April.

5. A calendar-year employer wants to make a profit-sharing contribution for 2026 but has no cash until spring 2027. It extends its return to 15 September 2027 and contributes on 1 September 2027. Is the contribution deductible for 2026?

Answer: Yes. IRC § 404(a)(6) deems a payment made on the last day of the preceding taxable year if it is on account of that year and made no later than the time prescribed for filing the return including extensions. A timely extension moves that date to 15 September 2027, and the 1 September payment is inside it. The employer must be able to show the contribution was on account of 2026.