I’ll take a stab at answering. By no means am I an expert, so if someone sees something wrong, feel free to correct my guesswork.

I’ll explain it with an example of a Captain making $300,000 annually with a Direct Contribution plan of 16% in 2018 who is under 50 years old.

The personal contribution limit is $18,500 for those under 50. You can throw on additional $6,000 over 50. The total employee and employer contribution limits are $55,000. Your $18,500 contribution is included in the $55,000 limit. Therefore, you have an allotment of $36,500 remaining. If that Captain has a DC plan of 16% in a cash over cap plan, the company owes him $48,000. However, he only has room for $36,500 in his 401(k). The remaining $10,500 is the cash over cap funding and will be taxed in whichever account he directs the monies to.

There is also another IRS limit in play. There is annual limit of $275,00 that applies to DC plans. Once you hit that limit, the company is off the hook on contributions. So the Captain that earns $300,000 will hit the cap at $275,000 leaving a company contribution of $44,000 in the DC Plan. There would be $4,000 remaining over the cap in this instance that would be taxed.

Neither cap has ever applied to me, so I can’t know for sure, but I think that is how the IRS limits are applied. I’d this Captain wanted to maximize his tax efficiency, he should contribute just $11,000 and the company would put in the remaining $44,000 with an additional $4,000 cash over cap. But like I said, this is all just guesswork.

Here’s a link:

https://www.irs.gov/retirement-plans...e-annual-limit