The Nuts and Bolts of a 401(k) plan

Limits on Contributions

The IRS limits contributions to 401(k) plans in three different ways:

1. Dollar Limits on Pre-Tax Contributions

The IRS places an annual dollar limit on pre-tax contributions to 401(k) plans, which is indexed for inflation. In 2020, the pre-tax 401(k) contribution set by the IRS $19,500 in 2020 ($19,000 in 2019). If you're 50 or older, the plan limits are $26,000 in 2020, $25,000 in 2019 plus $6,500 in 2020 (up from $6,000 in 2019) in catch-up contributions if you are at least age 50 or over at the end of the calendar year.

2. Overall Limits on Contributions by You and Your Employer

The total annual contribution to your 401(k) plan contributions by both an employee and an employer cannot exceed $57,000 in 2020. Catch-up contributions for employees 50 and older bump the 2020 maximum to $63,500. In 2019, the total limits were $56,000, and $62,000 for those 50 and older. Your employer decides the maximum contribution you can make depending on your company's 401(k) plan.


Defined Contribution Plan Limits 2020 2019 Change
Maximum employee elective deferral*  $19,500  $19,000  +$500
Employee catch-up contribution (if age 50 or older by year-end) **  $6,500  $6,000  +$500
Maximum employee elective deferral plus catch-up contribution (if age 50 or older by year end)   $26,000  $25,000  +$1,000
Defined contribution maximum limit, all sources (employee + employer) ***  $57,000  $56,000  +$1,000
Defined contribution maximum limit (if age 50 or older by year end); maximum contribution all sources plus catch-up  $63,500  $62,000  +$1,500
Employee compensation limit for calculating contributions  $285,000  $280,000  +$5,000
Key employees' compensation threshold for nondiscrimination testing  $185,000   $180,000  +$5,000
Highly compensated employees' threshold for nondiscrimination testing****  $130,000  $125,000  +$5,000

 *The $19,500 elective deferral limit is also known as the 402(g) limit, after the relevant tax code section.

**The $6,500 catch-up contribution limit for participants age 50 or older applies from the start of the year to those turning 50 at any time during the year.
***Total contributions from all sources may not exceed 100% of a participant's compensation.
****For the 2020 plan year, an employee who earns more than $125,000 in 2019 is an HCE. For the 2021 plan year, an employee who earns more than $130,000 in 2020 is an HCE.
Source: IRS Notice 2019-59.

 Remember, in the case of any IRS limit, you can contribute only the lowest amount for which you are eligible under any of the limits.

3. Limits on Highly Compensated Employees

Regulations under the Internal Revenue Code, not your employer, may also limit the percentage of pay that highly compensated employees, generally those earning in excess of $130,000 in 2020 ($125,000 in 2019), can contribute based on the average percentage contributed by all other employees in any one year.

Even if you are a highly compensated employee, you should consider contributing the maximum you are allowed under the 401(k) plan, and explore other avenues to save for retirement.

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