401(k)ology: IRC §415(c) Annual Additions Limitation

Saving for retirement through a 401(k) plan offers significant tax advantages, but it also comes with important limits that can be easy to overlook. One of the most important, and often misunderstood, is the IRC §415 limit, which caps the total contributions that can be made to each participant’s account each plan year. While the basic concept is straightforward, the rules become more complex when individuals work for multiple employers or organizations with shared ownership. Add catch-up contributions to the interplay with the IRC §415 limit and it gets even more confusing. Understanding how these limits apply can help avoid costly mistakes and maximize retirement savings opportunities.

401(k) plans that offer only deferrals and matching contributions rarely have participants that exceed the IRC §415 limit (annual additions limitation). However, many 401(k) plans now offer voluntary after-tax contributions allowing participants to save even more toward retirement, and it is the after-tax provision that seems to cause the majority of §415 excess annual additions. 401(k) plans that allocate profit sharing contributions, in addition to deferrals and match, are also prone to excess annual additions.

In this article, we break down the §415 limits, how they work, and why they matter, especially if participants work for more than one employer in a year, for related companies, or for companies that become related through a merger or acquisition. In addition, we will address how age 50+ catch up contributions factor into the equation. Lastly, we cover the correction method for excess annual additions.

What Is the IRC §415 Limit?

In simple terms, the IRC §415(c) limits apply a cap on the total amount that can be contributed to an individual’s qualified retirement plan each year. The majority of plans run on a calendar year plan year and limitation year; however, many 403(b) plans run on a fiscal year plan year and limitation year. The rules are the same, but the calculation for fiscal year based plan years is much more challenging because catch-up contributions are generally determined on a calendar year basis.

For 401(k), profit sharing and 403(b) type defined contribution plans, the §415 limit sets a ceiling on the combined total of:

• Employee deferrals (pre-tax and Roth 401(k))

• Employer contributions (safe harbor, matching or profit sharing)

• Employee after-tax contributions

• Allocated forfeitures

• Qualified Non-Elective Contributions (QNECs) and other corrective allocations under EPCRS

The §415 limit includes everything allocated to the participant’s account (excluding investment earnings). Think of this as new money going into the account attributed to a specific plan year. To illustrate, an employer’s profit sharing contribution that is allocated on 2026 compensation but not deposited until 2027 counts as a 2026 annual addition.

For 2026, the §415(c) annual additions limitation is the lesser of:

• 100% of the employee’s compensation, or

• $72,000 ($80,000 if age 50+ with catch-up contributions)

For the purpose of determining the 100% of compensation limit, total gross compensation is used regardless of the definition of eligible plan compensation for allocating contributions. Another important distinction is the §415 limit is different from the employee deferral limit (the amount each individual can contribute, e.g., $24,500 in 2026).

The IRS uses the §415 limit to ensure retirement plans remain tax-advantaged savings tools, rather than unlimited tax shelters. Without the dollar cap and applicable nondiscrimination testing, highly compensated employees could contribute (or receive contributions) at levels far beyond what would be considered non-discriminatory.

How does §415 Apply to Related Entities?

If employers are related, participants get only ONE combined §415 limit across all plans. The IRS views related employers as a single employer for retirement plan purposes. This is where many compliance issues arise, especially following a business transaction where employers become related.

Companies are considered related if they are part of:

• A controlled group (common ownership)

• An affiliated service group

• Certain other ownership or service relationships defined by IRS rules

Note: When companies are involved in a stock acquisition or merger, those entities can become related and careful consideration should be made to coordinate the annual additions limitation if multiple plans are involved.

Examples of related entities include:

• Parent and subsidiary companies

• Brother-sister companies with common owners

• Professional service organizations sharing ownership/management

Example 1 – 415 Limit with Related Employers

In 2026, James works for both Company A (primary employer) and Company B (related entity under common ownership) and participates in both retirement plans of the respective employers.

James, age 45, is allocated $50,000 in Company A’s plan and $40,000 in Company B’s plan. James’ deferrals did not exceed $24,500 in 2026. James’ total §415 Limit is $72,000 for 2026 because the employers are related.

In this example, James has excess annual additions of $18,000 ($90,000 - $72,000) that must be corrected pursuant to the IRS’ correction program (discussed below). Neither plan allocated more than $72,000 to James, but because the employers are related, the plans must be aggregated for purposes of applying the §415 limit.

Example 2 – 415 Limit when there is a Merger or Acquisition

James works for Company A at the start of 2026, but that entity is acquired in a stock transaction by Company B on March 31, 2026. James contributes to Company A’s 401(k) plan from January – June 2026, at which time payroll and benefits are moved to Company B and all contributions to Company A’s plan cease. James’ total contributions under Company A’s plan are $50,000, including deferrals, after-tax contributions and employer matching contributions.

From July to December 2026, James is an eligible participant in Company B’s 401(k) Plan. When there is a stock acquisition or a merger of two entities, those entities become related on the closing date of the transaction (March 31, 2026). James’ total §415 Limit is $72,000 for 2026 because the employers are related in 2026. Therefore, James is limited to a total of $22,000 ($72,000-$50,000) in contributions under Company B’s 401(k) Plan.

Applying the limits across multiple plans can be a compliance challenge for employers. The key to successful compliance is establishing a process to coordinate contributions and compensation across multiple payroll and plan service providers. That process should include:

• Aggregating compensation across entities

• Aggregating contributions across plans

• Aggregating elective deferrals across plans

How does §415 Apply to Unrelated Entities?

Employees working for two or more completely unrelated companies will have separate §415 limits for each employer’s plan. While §415 limits are separate for unrelated employers, the employee deferral limit ($24,500 for 2026) is shared across all jobs. For more on excess deferrals, refer to our post on Excess Deferrals.

Example 3 – 415 Limit with Unrelated Employers

The facts are the same as Example 1, except that James works for two completely unrelated employers in 2026. Even though James has total allocations of $90,000, there is not a §415 limit excess because each employer’s plan is tested separately under §415(c). Neither plan exceeds the $72,000 limit and because James does not exceed $24,500 in deferrals between the two plans, there is no excess that needs to be corrected. James’ total retirement savings are $90,000 for 2026.

Example 4 – 415 Limit when Employee Changes Job Mid-Year

Expanding on Example 3, James works for Company A from January – June 2026 during which time he makes deferrals totaling $24,500, receives match of $10,000 and contributes $37,500 in after-tax contributions for a total of $72,000. James terminates Company A and is hired by Company B, a completely unrelated employer. James starts participating in Company B’s plan immediately in July 2026.

James has already reached the deferral limit for 2026 under Company A’s plan, so he cannot make deferrals to Company B’s plan, but Company B’s plan also includes a provision for after-tax contributions. James is a crafty saver and elects to make after-tax contributions to Company B’s plan from July to December 2026 totaling $72,000. James has not exceeded the individual deferral limit for 2026 and does not have §415 excess in either plan. James’ total retirement savings for 2026 are $144,000!

James is not a Highly Compensated Employee under Company B’s plan because he does not have lookback compensation in 2025 from Company B and he is not a more than 5% owner of Company B. Totally legit; James has no corrections needed for 2026 under either plan.

How do Catch-Up Contributions Interact with § 415 Limits?

Catch-up contributions are designed to help people age 50 or older boost their retirement savings. But importantly, they are treated differently from regular contributions under IRC §415. Catch-up contributions do NOT count toward the §415 limit.

There are two separate limits working together:

1. §402(g) Limit (Employee Deferrals) - This is an individual limit that caps salary deferrals on a calendar year basis. Example (2026):
   $24,500 standard limit
   $8,000 catch-up (age 50+)
   Total possible deferrals: $32,500

2. §415 Limit (Total Contributions) - This limit caps the total contributions to a retirement plan and is tracked on a limitation year basis (typically the same as the plan year). Example (2026):
   $72,000 total limit, excluding catch-up contributions
   $8,000 catch-up (age 50+)
   Total possible contribution limit: $80,000

Example 5 – 415 Limit + Catch-up Contributions

In this example, assume that James is age 55 and makes deferrals to the plan totaling $32,500 for 2026. In addition, James makes voluntary after-tax contributions totaling $38,000 and receives employer contributions for the 2026 year totaling $14,000. His total contributions for 2026 are $84,500.

The annual additions limit for 2026 is $72,000 but James is catch-up eligible; therefore, $8,000 of those deferrals do not count in the annual additions limit under §415(c). James’ annual additions for purposes of the §415 limits are $76,500 ($24,500 + $38,000 + $14,000). James has excess annual additions of $4,500 that must be corrected.

Note: The same rules apply to the age 60-63 super catch-up contributions.

Example 6 – 415 Limit + Catch-up Contributions on a Fiscal Year basis

Applying annual plan limits for plans that run on a fiscal (non-calendar) year basis is complicated even for the seasoned retirement plan professional. For this example, the plan and limitation year are July 1, 2025 to June 30, 2026. Because the plan year begins in 2025, the annual compensation limit for the plan year is based on the compensation limit applicable to 2025 ($350,000); however, the other plan limits are based on the end of the plan year. In this case, the §415 annual additions limit is $72,000 (not $70,000).

Here is where things get complicated, determining the catch-up contribution applicability. As a reminder, catch-up contributions only occur once a limit has been exceeded. Since deferral limits are tracked on a calendar year basis, the catch-up contributions would be determined at December 31, 2025. The catch-up limit for calendar year 2025 was $7,500.

James defers $31,000 in calendar year 2025, of which $7,500 is catch up contributions. The 2025-2026 plan year includes:

• Half of calendar 2025 (July–December 2025)

• Half of calendar 2026 (January–June 2026)

Next determine how much of the $31,000 made in calendar 2025 falls between 7/1/2025–12/31/2025. Let’s assume (for illustration) uniform deferrals:

• $31,000 ÷ 12 = $2,583/month

• July–December (6 months) = $15,500 in the plan year

If the employee defers $23,500 before July 1, 2025, then the catch-up dollars may fall entirely inside the 2025-2026 plan year. If not, catch-up contributions may be partially or fully outside of the plan year. The allocation of deferrals in the calendar year cannot assumed to be proportional, the actual payroll timing will dictate what plan year §415 limit will be impacted. For the 2025-2026 plan year, §415 annual additions include only non-catch-up contributions made during that plan year.

• Included in §415:
  Portion of the $23,500 (regular deferrals) that falls in the plan year

• Portion of the 2026 regular deferrals made Jan-Jun 2026

• Employer contributions for the 2025-2026 plan year

Excluded from §415:

• Any portion of the $7,500 catch-up that falls in the 2025-2026 plan year

Off-calendar year plan year limits can be very complex, so consulting retirement plan professionals is highly recommended. In summary, the steps to determine catch-up contribution application for fiscal year plans should follow this methodology:

• Reconstruct calendar-year deferrals first

• Then identify which dollars are catch-up

• Then determine what portion of those dollars fall into the plan year for §415 purposes

How are Excess Annual Additions Corrected?

Excess annual additions require corrective distributions (refunds) be made to the affected participants. The deadline to process a refund of excess annual additions is the last day of the plan year following the plan year in which the excess arose. For excess §415 allocations occurring in calendar year 2026 based plans, the deadline is December 31, 2027. Failure to refund excess annual additions under §415 is a plan qualification failure.

If the excess includes both employer money and employee contributions, the correction follows a set order pursuant to the Employee Plans Compliance Resolution System (EPCRS):

• First, return any unmatched after-tax contributions (plus earnings) to the participant.

• Next, return any unmatched pre-tax contributions (plus earnings) to the participant.

• If there is still extra left, deal with contributions that were matched by the employer:
  First, apply it to after-tax contributions and their related matching funds.
  Then apply it to pre-tax contributions and their related matching funds.

When refunding matched after-tax contributions or deferrals, the refunds should be determined considering the associated match to prevent too much being refunded to the participant.

If there are still excess annual additions that come from employer contributions (matching or other employer contributions), those amounts (plus earnings) are not paid out to the participant. Instead, they are taken out of the participant’s account (forfeited) and placed in a separate holding account.

Pursuant to EPCRS, the forfeited excess amounts are used to reduce how much the employer has to contribute to the plan in the current or future years. While there is money sitting in this holding account, the employer is not allowed to make new employer contributions to the plan. The employer must use these amounts before adding new employer contributions to the plan.

Conclusion

§415 limits play an important role in determining how much can go into a 401(k) plan each year, and they matter even more in complex employment situations. Whether someone participates in plans sponsored by unrelated employers or needs to coordinate contributions across related entities, understanding how these rules work, including catch-up contributions, can help avoid compliance issues and make the most of retirement savings opportunities. By monitoring contributions and coordinating across plans, participants can maximize their savings without violating IRS rules.

Thanks for reading and keep following 401(k)ology as we continue untangling the complexities of modern plan administration, one topic at a time. Newfront Retirement Services team is ready to help your organization make sense of all the regulations. Feel free to contact me or just connect to keep up to date on all things ERISA 401(k): Joni_LinkedIn and 401(k)ology

Helpful Links:

• 401(k)ology – Related Employers

• EPCRS Overview

• IRS - Fixing common plan mistakes - Failure to limit contributions for a participant

• IRS - Treatment of 415(c) dollar limitations in a short limitation year

• IRS - 403(b) plan Fix-it Guide — Your 403(b) plan doesn’t limit the total employer and employee contributions to not exceed the IRC Section 415(c) limits

• IRS - COLA increases for dollar limitations on benefits and contributions

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