In an Employee Plans news alert, the IRS has reminded taxpayers that for 2021 the aggregate total of salary deferrals to retirement plans is limited to $19,500 (plus an additional $6,500 if age 50 or over). Taxpayers who have salary deferrals that exceed the limit for 2021, must withdraw the excess amount, plus earnings, by April 15, 2022.
Taxpayers who made salary deferral contributions to two or more retirement plans in 2021 may be most at risk for exceeding the deferral limit.
For a taxpayer who withdraws excess salary deferrals, plus earnings, by April 15, 2022:
- Excess deferrals are taxed as 2021 income.
- Earnings on excess deferrals are taxed as income in the year withdrawn (2022).
- Excess deferrals aren’t subject to the 10% early distribution tax, 20% withholding, or spousal consent requirements.
However, if taxpayers with excess deferrals don’t withdraw those excess deferrals, plus earnings, by April 15, 2022:
- Excess deferrals are taxed as income in 2021 and again when they are withdrawn.
- Earnings on the excess are taxed in the year withdrawn.
- Withdrawals may be subject to the 10% early distribution tax, 20% withholding, and spousal consent requirements.
To avoid double taxation, taxpayers who have exceeded the contribution limits should ask their plan administrator to distribute any excess amounts to them before April 15, 2022.
When a taxpayer contributes to more than one plan, the taxpayer should keep in mind the following when deciding from which plan to request a distribution of excess contributions: getting the maximum matching contribution that may be offered; type of investments in the plan; and plan fees.
To continue your research on limitations on the amount of an employee’s elective contributions to a cash or deferred Arrangement (CODA), see FTC 2d/FIN ¶ H-9150.
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