Contribution limits when switching employers

Submitted by Mocha Wocha on Sun, 2022-07-24 00:01

Looking for advice on limits (with valid IRS citation/links preferred)

My situation:I have already maxed out my contributions and hit my 61k limit in May. (I am in my 30’s so no catch up in my case.)

Breakdown:
pre- tax 401k elective contribution via my pay – $20,500
Employer match contribution – $10,250
After tax (with in plan roth conversion)-$ 30,250

I plan to switch employer soon ( completely different company and not related to my current employer in any way) and my new employer also offers similar 401k plan with mega backdoor Roth option.

I know i can’t make pre tax 401k contributions, but what about after tax ( with in plan conversion).
How much more can I contribute?

I’ve researched a bit, but most examples seem to be about solo 401k, side hustle etc.

https://irahelp.com/slottreport/what-limits-apply-if-i-participate-two-company-plans

https://www.irs.gov/retirement-plans/issue-snapshot-403b-plan-application-of-irc-section-415c-when-a-403b-plan-is-aggregated-with-a-section-401a-defined-contribution-plan

https://www.kitces.com/blog/coordinating-contributions-multiple-employer-sponsored-defined-contribution-plans-401k-defined-benefit/

https://www.reddit.com/r/financialindependence/comments/opuzix/psa_when_changing_jobs_19500_401k_contribution/

Can someone shed some light on this topic.

So far it looks like I can make another $30250 this year in after tax contributions with my new employer plan without going over 415 c limit.

But I want to be sure.



Submitted by William Tuttle on Sun, 2022-07-24 19:29

  • A one-participant 401k, is still just a 401k plan subject to almost all 401k tax laws, IRS regulations and guidance.
  • While there is only one employee deferral limit (2022 = $20.5K) across all 401k, 403b and SIMPLE IRA plans. There is a separate (employee + employer) annual addition limit (2022 = $61K) for each unaffiliated employer.
  • As long as the two employers are not a controlled or affiliated service group, you can contribute up to ($61K – any employer contributions)* to the 2nd employer. *Subject to any employer/401k plan limitations.
  • *Even in a safe harbor 401k plan, employee after-tax contributions are subject to ACP testing, which may likely limit your contributions. Check with the new 401k plan on this issue.


Submitted by Mocha Wocha on Sun, 2022-07-24 21:34

@spiritrideri really don’t follow your response. Are you saying I can contribute additional 61k as after tax with my new employer plan? 



Submitted by William Tuttle on Mon, 2022-07-25 01:59

Yes, if there are no employer contributions and subject to any 401k plan limits and any ACP limitations. Some plans limit employee after-tax contributions to a certain percentage. If you will be an HCE, it is unlikely that ACP testing will allow you to make a contribution that large.



Submitted by Mocha Wocha on Mon, 2022-07-25 05:26

what is HCE and ACP? I am not familiar with these acronyms.  (Company 2 is completely  unrelated to Company 1, and both are large corporations with no control/ ownership stake on my part.) So looking at my company 1 contributions  breakdown I’ve already made this year.Breakdown: 

  • pre- tax 401k elective contribution via my pay – $20,500
  • Employer match contribution – $10,250
  • After tax (with in plan roth conversion)-$ 30,250

 How much maximum can I contribute with company 2?  



Submitted by William Tuttle on Mon, 2022-07-25 20:20

  • ACP = actual contribution percentage
  • HCE = highly compensated employee
  • HCE limits; 2021 = $130K, 2022 = $135K
  • Most plans use your compensation from the prior plan year. If so, you will not be an HCE with the new employer for the 1st plan year. If the plan uses compensation from the current plan year, you will only be an HCE if your compensation for the remainder of the plan year is >= $135K.
  • ACP anti-discrimination testing is always done on employee after-tax contributions. Average HCE and non-HCE contribution percentages are compared. HCE contribution% is limited to a small percentage > non-HCE contribution%.
  • No one on this forum can tell you what effect this will have on you. Only the new employer/plan can answer this.
  • The same is true for any plan limitations. For example, a plan could limit all or just HCE employee after-tax contributions to 10% of compensation. Only the employer/plan can answer this.
  • You want to make sure you understand this before maximizing the $61K annual addition limit. Any excess 2022 contributions will be returned to by 3/15/23 including taxable earnings.


Submitted by Mocha Wocha on Tue, 2022-07-26 05:55

Thanks for the breakdown and detailing the acronyms. 

  1.  So if I understand this,  if my new employer plan ( company B)  allows me to fully contribute 61k via after tax.  I can go ahead and do it. If there are any HCE vs non- HCE limits. They may not allow it or will refund the excess after tax contributions by 03/15/23. Did I understand it properly?
  2. Is the ACP done against 61k ( company B only) contributions or total 91.25k ( 30.25k company A + 61k company B ) after tax contributions. How will company B know about my  unrelated company A contributions?
  3. How is the 415c limit calculated and applied for company B.
    • 61k only company B after tax contribution
    • 40.5k company B contributions + 20.5k  pre tax amount already contribute to company A plan
    • 30.25k company B contributions + 20.5k  pre tax amount already contribute to company A plan + 10.25k from company A employer match pre tax contributions.

      



    Submitted by William Tuttle on Tue, 2022-07-26 11:20

    As I stated in my first post.

    • While there is only one employee deferral limit (2022 = $20.5K) across all 401k, 403b and SIMPLE IRA plans. There is a separate (employee + employer) annual addition limit (2022 = $61K) for each unaffiliated employer.


    Submitted by Mocha Wocha on Tue, 2022-07-26 14:23

    it’s still not clear how limits are applied/calculated across 2 employers come tax season. Can you share an example of what you mean by annual  addition is separate? 



    Submitted by Alan - IRA critic on Tue, 2022-07-26 15:28

    • For unrelated employers as is the case here, you have a separate annual additions limit for total contributions (61k). However, elective deferrals is a per taxpayer limit of 20,500 and you have used up that limit with the first employer. Therefore, you cannot make any elective deferrals to the second plan, but if the plan allows for after tax non Roth contributions, you could contribute up to 61,000 to the second plan.
    • That said, your new plan will probably limit your after tax contributions for at least two reasons. First to reduce the chance that you would fail discrimination testing for HCEs, although in your first partial year, you would not fail the test. Also, if the plan matches after tax contributions that matching would be applied toward the 61,000 limit. As spiritrider indicated, only your new plan can tell you what your after tax contribution limit will be to the second plan.
    • The second plan will not know that you maxed out your 20,500 in elective deferrals with a prior employer. You need to be sure not to make elective deferrals, only after tax contributions to the new plan. Make that clear when you set up your contributions that you are only making after tax (sometimes referred to as “employee contributions”) contributions to the second plan.
    • Note that if you are doing in plan Roth rollovers (IRRs), if for any reason your after tax contributions exceed either the plan or the higher IRS limit, distributions will have to be made to you from your Roth 401k account as either excess annual additions or excess contributions.  Again, only your plan can tell you how much of the potential 61,000 limit you are actually allowed to contribute.


    Submitted by Mocha Wocha on Tue, 2022-07-26 19:05

    So it looks like, as long as company B plan allows it. I can deposit full 61k making only after tax contributions with my company B  and it has no bearing to  the 61k I’ve already made with company A. 

    • i do not plan any rollover.
    • i do not plan to do any more pre tax contributions
    •  i do not have any employer matching for after tax contributions.


    Submitted by Alan - IRA critic on Tue, 2022-07-26 19:59

    The in plan Roth rollover (IRR) that you did with the first plan and will also do with the second plan are rollovers, just confined to the same plan. Some plans offer an automatic IRR as soon as the after tax contributions are made, and that reduces any gain on those contributions that would be taxable as part of an IRR. Some plans that offer IRRs also offer rollouts to your Roth IRA, and some do not.



    Submitted by Mocha Wocha on Tue, 2022-07-26 20:14

    I did automatic in plan conversion with my company A after tax contributions. There was an option “Convert in plan to Roth” in fidelity i plan to do the same with company B. Are you saying that’s considered a rollover/IRR?



    Submitted by Alan - IRA critic on Tue, 2022-07-26 20:40

    Yes. It’s a tax free rollover to the Roth 401k account in your plan. This has no effect on the amount of after tax contributions you can make, but if you exceed the plan limit (which could be less than 61,000), the excess amount which is now in the Roth 401k will have to be distributed back to you.



    Submitted by Mocha Wocha on Wed, 2022-07-27 02:00

     just curious, is there any penalty from IRS for excess contribution and distribution?



    Submitted by Alan - IRA critic on Wed, 2022-07-27 02:06

    There is no early distribution penalty, but any earnings distributed on the excess contribution will be taxable in the year distributed.



    Submitted by ssel on Wed, 2022-07-27 04:25

    • If you make excess deferrals and do not have the excess returned, there doesn’t seem to be an explicit penalty, although the rules will cause you to pay tax on the excess twice (once in the current year, which you’d pay anyway, and again when you eventually withdraw the funds).
    • My company offers a 50% match on all contributions.  Someone starting this year would likely come out ahead by overcontributing and leaving it in, collecting the match and paying some extra tax (at a distant future date) on the excess.


    Submitted by Mocha Wocha on Wed, 2022-07-27 04:40

    Thanks for clarifying the double taxation issue in excess contributions. Sadly my company won’t match any after tax contributions. I’ll make sure not to cross 61k in after tax contributions at company B.



    Submitted by William Tuttle on Wed, 2022-07-27 13:16

    • The annual addition limit applies to all employee + employer contributions.
    • It is less common, but some plans may make other employer contributions.
    • These could be from forfeitures, testing failures, etc…
    • Here again, check with the employer/plan on any possible limitations to full employee after-tax contributions up to the annual addition limit


    Submitted by Mocha Wocha on Wed, 2022-07-27 22:23

    • The annual addition limit applies to all employee + employer contributions.
    • what does this mean? Can you share an example, or  use my situation as an example.
  1. It is less common, but some plans may make other employer contributions.
    • Are you saying  company B plan can take into account my company A contribution and  limit my future contributions with company B?
  2.  Yes I plan to check with fidelity to verify the full employee after tax limit. TIA.


    3. Submitted by William Tuttle on Wed, 2022-07-27 23:14

    You need to stop reading too much into things. I can’t say things any clearer than I have. Maybe it is me, but I will not be replying anymore to this thread.



    Submitted by Mocha Wocha on Thu, 2022-07-28 05:13

    Thank you for your help.  1 feedback (and take it with a grain of salt) overall, I felt  your comments were verbose in terminology and text, but didn’t  answer the question in  simple straightforward way, it would have been much more effective using the numbers and scenario I provided. But anyways once again thank you for your help.



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