4047 / What is the limit on excludable amounts that may be contributed to tax sheltered annuity plans under salary reduction agreements?

The amount of elective deferrals that an individual can exclude from income for a tax year is limited. Elective deferrals are:

(1)  amounts contributed to tax sheltered annuity plans under salary reduction agreements;

(2)  amounts contributed under cash or deferred arrangements to 401(k) plans ( Q 3751) and salary reduction SEPs (“SAR-SEPs”) ( Q 3705); and

(3)  amounts contributed under salary reductions to SIMPLE IRAs ( Q 3706).¹

Elective deferrals do not include elective contributions made pursuant to a one-time irrevocable election that is made at initial eligibility to participate in the salary reduction agreement or pursuant to certain other one time irrevocable elections specified in regulations, or pre-tax contributions made as a condition of employment.²

For 2020-2021, the aggregate limit on elective deferrals was $19,500, and the limit for 2022 is $20,500. The limit increased to $22,500 in 2023, $23,000 in 2024 and $23,500 in 2025.³ The elective deferral limit is indexed for inflation in increments of $500.⁴