A salary reduction agreement is a written authorization you sign to have your employer divert a set portion of each paycheck into a retirement account before the money reaches you. For 2026, you can defer up to $24,500 this way, with higher amounts available once you turn 50.1Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Cost-of-Living The same type of agreement is used across 401(k), 403(b), 457(b), and SIMPLE IRA plans, which is why you’ll see it referred to by the shorthand SRA on many benefits forms.
How the Agreement Works in Practice
When you sign one, you’re instructing your employer to withhold either a flat dollar amount or a percentage of your gross pay each pay period and send it to the plan’s investment provider. Because the deducted amount is not paid to you as wages, it doesn’t appear in your taxable income for the year (assuming a pre-tax election), so your current federal income tax bill drops accordingly.2U.S. Securities and Exchange Commission. 403(b) and 457(b) Plans The money is still yours; it just sits in the retirement account and grows tax-deferred until you withdraw it.
The mechanism is the same regardless of plan type. Public school teachers and nonprofit employees typically use SRAs with 403(b) plans. State and local government workers use them with 457(b) plans. Private-sector employees encounter them inside 401(k) plans. Small businesses offering SIMPLE IRAs rely on them too.3Internal Revenue Service. IRC 457(b) Deferred Compensation Plans In each case, you authorize the deduction in writing and your employer adjusts payroll to match.
Pre-Tax or Roth: The Decision on the Form
Most SRA forms ask you to pick between two contribution types. A pre-tax (traditional) election reduces your taxable wages now, and every dollar you eventually withdraw in retirement is taxed as ordinary income.4Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts A Roth election works the opposite way: you pay income tax on the contribution now, but qualified withdrawals in retirement (including all the growth) come out tax-free.
You can split your deferral between the two, but the total counts against a single annual cap under Section 402(g). For 2026 that combined cap is $24,500.4Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
One change on the horizon: beginning in 2027, the SECURE 2.0 Act will require certain higher-income participants to make catch-up contributions as Roth rather than pre-tax.5Internal Revenue Service. Treasury, IRS Issue Final Regulations on New Roth Catch-Up Rule, Other SECURE 2.0 Act Provisions For the 2026 plan year, that rule is not yet in effect.
What to Put on the Form
The form itself is short, but the details matter for payroll. You’ll list your full legal name and Social Security number for tax reporting. You’ll identify the plan provider or financial institution receiving the funds, which is worth double-checking if your employer works with more than one vendor.
The main decision is how much to contribute. Most forms let you choose a flat dollar amount per pay period or a percentage of gross pay. You’ll also confirm your payroll frequency (weekly, biweekly, semimonthly, or monthly) and the date contributions should start. The same form is typically used to increase, decrease, or stop deferrals later. If your plan accepts both pre-tax and Roth contributions, expect separate fields specifying how your total deferral breaks down between them.
After you finish the form, submit it to payroll or human resources. Most employers accept it through a secure online portal, an encrypted email, or a benefits administration website; some plans still require a physical signature on paper. The change should show up on your pay stub within one to two pay cycles, depending on payroll cutoffs. Check your online benefits profile or watch for a confirmation email to verify it processed.
How often you can change or cancel an SRA depends on the plan. Some 403(b) and 457(b) plans allow modifications at any time; others limit changes to specific enrollment windows. SIMPLE IRA plans generally require employers to allow a 60-day election period each year. The plan’s summary description spells out the rules for your specific plan.
The Prospective-Only Rule
One rule catches people off guard. An SRA can only apply to compensation you haven’t yet earned or received.6Internal Revenue Service. Form 5304-SIMPLE You cannot go back and defer money from a paycheck already issued, or one you already have a right to. The start date on the agreement has to fall after the date you sign it, and no employer can waive that requirement because it comes from the tax code.
2026 Contribution Limits
Under Section 402(g) of the Internal Revenue Code, the basic elective deferral limit for 2026 is $24,500 for participants in 401(k), 403(b), and governmental 457(b) plans.1Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Cost-of-Living The figure adjusts annually for inflation.
If you’re age 50 or older by the end of the calendar year, you can add $8,000 in catch-up contributions, bringing your total possible deferral to $32,500.7Internal Revenue Service. Retirement Topics 403b Contribution Limits The SECURE 2.0 Act added a higher tier for participants aged 60 through 63: during those years your catch-up rises to $11,250, for a maximum deferral of $35,750.8Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 Once you turn 64, you go back to the standard $8,000.
SIMPLE IRA plans use lower figures. For 2026 the basic employee deferral limit is $17,000, with a $4,000 catch-up at age 50 (or $5,250 for ages 60 through 63).
Two special catch-ups also exist outside the age-based framework. Long-tenured employees of certain 403(b) employers (public schools, hospitals, churches, and some health and welfare agencies) with 15 years of service may qualify for an extra $3,000 a year, capped at $15,000 over a lifetime.7Internal Revenue Service. Retirement Topics 403b Contribution Limits Governmental 457(b) plans offer a separate three-year catch-up in the three years before the plan’s normal retirement age, allowing up to double the standard limit to the extent you underused prior years’ limits.9Internal Revenue Service. Retirement Topics 457b Contribution Limits Both are plan-specific, so ask your plan administrator whether either applies to you.
How Employer Matching Interacts With Your Limit
Many employers match a portion of what you defer. A common formula is 50 cents on the dollar up to 6% of pay. The important planning point: employer matches do not count toward your $24,500 Section 402(g) limit.10Internal Revenue Service. 401k Plans Deferrals and Matching When Compensation Exceeds the Annual Limit You can max out your own deferrals and still receive the full match.
A separate ceiling under Section 415(c) does exist. The combined total of your deferrals, employer matches, and any other employer contributions cannot exceed $72,000 for 2026 (catch-up contributions are not counted).1Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Cost-of-Living Most workers never approach this figure, but highly compensated employees with generous matching should keep it in view.
If You End Up Contributing Too Much
Exceeding the Section 402(g) limit produces what the IRS calls excess deferrals, and the fix has a hard deadline. You have until April 15 of the following year to notify your plan and have the excess (plus any earnings on it) distributed back to you.11Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust Meet that deadline and the excess is taxed in the year you contributed it, with earnings taxed in the year they come out.
Miss the April 15 deadline and the same money gets taxed twice: once in the contribution year and again when eventually distributed from the plan. The late distribution may also be hit with the 10% early withdrawal penalty, 20% mandatory withholding, and spousal consent requirements.12Internal Revenue Service. Consequences to a Participant Who Makes Excess Deferrals to a 401(k) Plan The scenario is preventable by tracking your total deferrals across all plans during the year, which matters especially if you work two jobs with separate retirement plans.
Getting to the Money Later
Because an SRA funds a retirement account, the deferred money is generally locked up until age 59½. Early withdrawals from a 401(k) or 403(b) trigger a 10% penalty on top of regular income tax, though limited exceptions exist for things like qualifying medical expenses, federally declared disasters, birth or adoption costs, small emergency withdrawals, and distributions to domestic abuse victims. Governmental 457(b) plans are different: distributions from those accounts are not subject to the 10% penalty at any age, provided the money originated in the 457(b) rather than being rolled in from another plan type.13Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Regular income tax on pre-tax contributions still applies even when a penalty exception does.