401(k) glossary
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Contributions & limits
Elective deferral
Short definition
An elective deferral is the part of an employee’s pay that the employee chooses to have contributed to a 401(k) plan in place of receiving it in cash. Deferrals can be pre-tax or Roth and are always 100% vested. For 2027 the limit rises to $25,500.
What an elective deferral is
The employee elects a percentage of pay or a dollar amount, and the employer withholds it from each paycheck and sends it to the plan. Under automatic enrollment, the default rate counts as the employee’s election unless they opt out. Each person has one deferral limit across all of their plans: $24,500 in 2026, plus catch-up contributions from age 50.
For 2027 the limit rises to $25,500. (IRS Notice 2026-66)
Why it matters to employers
You have three jobs. Withhold what each employee elected, using the plan’s definition of compensation. Deposit the money as soon as it can reasonably be separated from company assets; for plans with fewer than 100 participants, the Department of Labor treats deposits within seven business days as on time. And stop deferrals at the limit. Deferral rates also drive the ADP test.
Example
An employee earning $90,000 elects 8%. Her deferrals are $7,200 a year, or $276.92 from each of 26 paychecks.
Common mistakes
Failing to start or change a deferral the employee elected. The usual correction is an employer contribution for the missed deferral, plus any missed match and earnings.
Applying the election to the wrong pay, such as skipping bonuses the plan counts as compensation.
Depositing deferrals late.
Basic Capital and this term
On Basic Capital, deferrals stop automatically at the limit. When a company moves its existing plan to Basic Capital, year-to-date contributions carry over so the limit still holds. Contributions an employee made at another employer aren’t carried over, so the employee tracks those.
Sources
Internal Revenue Service: Retirement topics: 401(k) and profit-sharing plan contribution limits (https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits), retrieved 2026-11-11 Internal Revenue Service: 401(k) plan overview (https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview), retrieved 2026-11-11 Internal Revenue Service: 401(k) plan fix-it guide: Eligible employees weren’t given the opportunity to make an elective deferral election (https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-eligible-employees-werent-given-the-opportunity-to-make-an-elective-deferral-election-excluding-eligible-employees), retrieved 2026-11-11 eCFR (National Archives): 29 CFR 2510.3-102: Definition of plan assets, participant contributions (https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-B/part-2510/section-2510.3-102), retrieved 2026-11-11 Internal Revenue Service: Notice 2026-66: 2027 amounts relating to retirement plans and IRAs (https://www.irs.gov/pub/irs-drop/n-26-66.pdf), retrieved 2026-11-13
General information, not legal or tax advice.
