Elective Deferrals to a Qualified Retirement Plan

What are elective deferrals?

If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. The amount you set aside called an elective deferral is treated as an employer contribution to a qualified plan. It is not included in wages subject to income tax at the time contributed.

Examples of elective deferrals

Elective deferrals include elective contributions to retirement plan such as:

1. cash or deferred arrangements (section 401k plans)

2. the Thrift Savings Plan for federal employees

3. Salary reduction simplified employee pension plans (SARSEP)

4. Savings incentive match plans for employees (SIMPLE plans)

5. Tax sheltered annuity plan (403b plans)

6. Section 457 plans

For each tax year, there is a limit of how much you should defer. For 2006, for example, you generally should not have deferred more than a total of $15,000 ($20,000 for employees age 50 or older) of contributions to the plans 1-5 listed above. You should not have deferred more than the lesser of your compensation or $15,000 ($20,000 for employees age 50 or older) of contributions to the plan listed in 6 above (section 457 plans).

Annual limit of contributions and your responsibility

Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit. Distributions from these plans are reported on Form 1099-R and are fully taxable.

Roth accounts and elective deferrals

A tax law for years after 2005 allows your 401k and 403b accounts to include a separate designated Roth account. Designated Roth contributions are treated as elective deferrals (subject to the same limits) except that the contributions are still included in income for the year earned and are considered your cost, as discussed earlier. A qualified distribution from a Roth account (five years after year of contribution) is not includible in income, neither the cost nor the earnings.