Glossary term
Elective Deferral Contribution
An elective deferral contribution is salary an employee elects to defer into a qualified workplace retirement plan instead of receiving as current pay.
Updated
Read time
What Is an Elective Deferral Contribution?
An elective deferral contribution is compensation an employee elects to defer into a workplace retirement plan instead of receiving as current pay. In a 401(k), it usually refers to the employee's pre-tax or Roth salary deferrals.
Elective deferrals are central to 401(k), 403(b), SIMPLE, and certain 457(b) plans. They are subject to annual limits, plan terms, payroll timing, and sometimes catch-up contribution rules.
Key Takeaways
- Elective deferrals are employee salary deferrals into a workplace retirement plan.
- Pre-tax and Roth deferrals usually share the same annual elective deferral limit.
- Employer matching and nonelective contributions are not employee elective deferrals.
- Deferral limits apply across certain plans, so multiple jobs can require coordination.
Pre-Tax and Roth Deferrals
A pre-tax elective deferral generally reduces current taxable income for federal income-tax purposes, though payroll taxes may still apply. A Roth elective deferral is included in current income but may qualify for tax-free treatment later if distribution rules are met.
The employee chooses the deferral amount, but the plan decides which options are available. A plan may allow pre-tax deferrals, Roth deferrals, both, automatic enrollment, contribution changes, or catch-up contributions for eligible participants.
Feature | Pre-Tax Deferral | Roth Deferral |
|---|---|---|
Current income tax | Generally deferred | Paid now |
Future qualified withdrawals | Generally taxable | Potentially tax-free |
Annual deferral limit | Shares employee elective deferral limit | Shares employee elective deferral limit |
Employer match | Based on plan formula | Based on plan formula if Roth deferrals count for match |
Limits and Coordination
The annual elective deferral limit applies to the employee's deferrals, not to every employer separately in all cases. Someone with more than one job or both a workplace plan and owner-only plan may need to coordinate deferrals across plans.
Elective deferrals also interact with ADP testing in traditional 401(k) plans. If the plan fails nondiscrimination testing, some highly compensated employees may receive returned excess contributions even if they did not exceed the annual dollar limit.
The Bottom Line
An elective deferral contribution is the employee's decision to move pay into a retirement plan. It is powerful because it can build retirement savings directly from payroll, but the tax treatment, limits, and testing rules matter.