January 2022

Deadline is 4/15/22 for Withdrawing a 2021 Excess Salary Deferral

Many individuals benefit by making elective deferrals under their employer’s 401(k) or 403(b) plan. Some individual may have two jobs and two employers who both sponsor a 401(k) plan. Some individuals may operate a self-employment business in addition to their main job. There are some individuals who make elective deferral contributions to multiple plans. For example, David makes 401(k) deferrals under his employer’s 401(k) plan, but he is self-employed as an artist. He has established a SIMPLE-IRA plan for his art business.

The law limits a person’s elective deferrals. The total of all salary deferrals a participant makes to various retirement plans - including 401(k), 403(b), SARSEP and SIMPLE-IRA plans - is limited to $19,500 (plus an additional $6,500 if age 50 or over) for 2021. Individuals who made salary deferral contributions to two or more retirement plans in 2021 may be most at risk for exceeding.

If a person exceeds this limit for 2021, they must take corrective action to withdraw the excess deferral amount, plus earnings, by April 15, 2022.

If a person withdraws the excess salary deferrals, plus earnings, by April 15:
• Excess deferrals are taxed in the calendar year deferred (2021)
• Earnings on the excess are taxed in the year withdrawn (2022)
• Excess is not subject to the 10% early distribution tax, 20% withholding, or spousal consent requirements

If a person doesn’t withdraw the excess salary deferrals, plus earnings, by April 15:
• Excess deferrals are taxed in the calendar year deferred (2021) and again in the year withdrawn
• Earnings on the excess are taxed in the year withdrawn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
• Make correction to the affected plan using the Self-Correction or Voluntary Correction Programs