What Is an Additional Voluntary Contribution?

An additional voluntary contribution (AVC) is a term describing an employee's tax-deferred payment to a retirement savings account that exceeds the amount his or her employer matches. The employee may make additional annual voluntary contributions up to certain IRS-approved levels.

Key Takeaways

  • Employees may contribute dollars to their retirement accounts above and beyond the percentage of their salaries that their employers will match.
  • Excessive contributions will trigger a 6% excess contribution tax, once the funds are withdrawn upon retirement.
  • The limit on IRA contributions for tax years 2019 and 2020 is $6,000, plus an additional $1,000 for employees ages 50 and older.
  • The limit on most types of 401(k) plans is $19,000, plus an additional $6,000 for those ages 50 and over for tax year 2019, and $19,500 plus an additional $6,000 those ages 50 and older for tax year 2020.

The limit on most types of 401(k) plans is $19,000 per year, plus an additional $6,000 for those ages 50 and over, for tax year 2019. For 2020, the limit is $19,500, plus an additional $6,000 for those ages 50 and over. These figures differ slightly for IRA contributions. Case in point: for tax years 2019 and 2020, the contribution limit is $6,000, plus an additional $1,000 for employees ages 50 and older.

There is an exception when it comes to SIMPLE IRAs, which imposed a $13,000 contribution limit in 2019 and have a $13,500 limit in 2020. These IRAs, which are relatively uncommon, may only be offered by businesses that employ fewer than 100 staffers.

In all of the aforementioned cases, those numbers listed do not include any employer contribution components. Furthermore, for employees with multiple retirement accounts, the combined limit remains the same.

Understanding the AVC

Employees can make additional voluntary contributions to tax-deferred savings accounts such as 401(k), 403(b), SEP IRA, SIMPLE IRA, traditional IRA, and Roth IRA plans. All but the Roth IRAs allow the employee to contribute pre-tax dollars. This essentially means that employees may postpone paying income taxes on this portion of their salaries until they withdraw the money upon retirement. But Roth IRAs stand-alone, in that income taxes are paid at the time contributions are made.

The Employer Match

With employer-sponsored retirement plans, employers can match the percentage of the salary that an employee contributes, up to a threshold, which generally hovers around 3%. On rare occasions, some companies offer programs with higher matching maximums, while others offer no matching options of any kind.

The IRS may impose a tax on excess contributions, which are those offerings that go beyond the additional voluntary contribution limit.

Tax Consequences of Excess Contributions

Additional voluntary contributions may vary in tax treatment, depending on the type of plan. But for those contributions made to tax-deferred accounts, any returns will accumulate tax-free until retirement. When funds are finally withdrawn upon retirement, the IRS will levy a 6% tax on the extra amount contributed, and on any investment returns earned by that money every year until then.