Can Two Companies Contribute Collectively Up to the IRS Limit?

When it comes to making contributions to a retirement plan, there are certain limits set by the Internal Revenue Service (IRS) that individuals and companies must adhere to. These limits are in place to ensure fairness and prevent abuse of the system. But what happens when two companies want to contribute collectively? Can they pool their resources and contribute up to the IRS limit? Let’s find out.

The Relationship Between the Two Companies

The first thing to consider is the relationship between the two companies. If there is no relationship between them, then yes, collectively up to the contribution amount allowed by the IRS. Each company can make contributions independently, as long as they stay within their respective limits.

However, if the two companies are related in some way, such as being part of the same corporate group or having common ownership, then the IRS treats them as a single employer. In this case, their contributions are aggregated, and they must stay within the combined limit set by the IRS.

Understanding the IRS Contribution Limits

Before we delve deeper into this topic, let’s first understand the contribution limits set by the IRS. For 2021, the maximum amount an individual can contribute to a 401(k) plan is $19,500. This limit applies to both traditional and Roth 401(k) plans.

Additionally, individuals who are 50 years or older can make catch-up contributions of up to $6,500, bringing their total contribution limit to $26,000. These catch-up contributions are designed to help older individuals boost their retirement savings.

Now, if two unrelated companies each have their own 401(k) plans, they can individually contribute up to the IRS limit. For example, if Company A and Company B are unrelated and each has its own 401(k) plan, they can both contribute up to $19,500 (or $26,000 for individuals aged 50 or older) to their respective plans.

Pooling Resources for Collective Contributions

However, if Company A and Company B are related, they must aggregate their contributions and stay within the combined limit set by the IRS. Let’s say the combined limit is $39,000. In this case, Company A can contribute $25,000, and Company B can contribute $14,000 to reach the maximum limit.

It’s important to note that the combined limit is not simply the sum of the individual limits. The IRS sets the combined limit based on various factors, including the type of retirement plan and the overall financial health of the companies involved.

Benefits and Considerations

Pooling resources for collective contributions can have several benefits for related companies. By combining their contributions, they can maximize their retirement savings and provide better benefits to their employees. This can help attract and retain top talent, as a robust retirement plan is often seen as a valuable perk.

However, there are also considerations to keep in mind. Aggregating contributions may require additional administrative work and coordination between the companies. It’s important to ensure that all contributions are properly tracked and reported to the IRS to avoid any compliance issues.

Additionally, pooling resources may not always be feasible or advantageous for all companies. Each situation is unique, and it’s essential to consult with a qualified tax professional or financial advisor to determine the best approach for your specific circumstances.

In Conclusion

While unrelated companies can individually contribute up to the IRS limit, related companies must aggregate their contributions and stay within the combined limit. Pooling resources for collective contributions can be beneficial for related companies, but it requires careful planning and coordination. It’s always advisable to seek professional advice to ensure compliance with IRS regulations and make the most of your retirement savings opportunities.