401(k) plans can offer dramatically different contribution options. These contributions are subject to various IRS-defined annual limits. Employers should understand the limits applicable to their plan’s employee and employer contribution options.
Employee contributions are made by plan participants through payroll deduction.
- Elective Deferrals – Employees can make these contributions on a pre-tax or after-tax basis. After-tax elective deferrals are called Roth contributions.
- Voluntary After-tax Contributions - Like Roth contributions, these employee contributions are made on an after-tax basis. They are much rarer, however, due to special testing rules that limit their applicability.
Employer contributions made by an employer on behalf of their employees. They do not affect the paychecks of plan participants.
- Safe Harbor Contributions – Made by employers to automatically pass ADP/ACP and top heavy nondiscrimination tests.
- Match – Allocated to plan participants based on a percentage of their elective deferrals. An example of a match formula is 50% of elective deferrals up to 6% of compensation. In this example, a participant would receive a 3% match if they defer 6% or more of compensation.
- Profit Sharing – Can be allocated to any plan participant - even if the participant makes no elective deferrals.
402(g) Elective Deferral Limit
Elective deferrals are limited by IRC section 402(g). For 2023, the 402(g) limit is $22,500, or 100% of your annual compensation, whichever is less. Additional catch-up contributions may be allowed by your plan if you are age 50 or older ($7,500 “catch-up” for 2023).
If your elective deferrals exceed the 402(g) limit, the excess amount must be returned to you and included in your gross income.
415(c) Annual Additions Limit
“Annual Additions” represent the sum of all employee and employer contributions (including any reallocated forfeitures) made during the year. Annual Additions are limited by IRC section 415(c). For 2023, the 415(c) limit is the lesser of:
- 100% of your compensation
- $66,000 ($73,500 including catch-up contributions)
ADP/ACP Test Limits
The contributions of Highly-Compensated Employees (HCEs) can be limited further when the Actual Deferral Percentage (ADP) and/or Actual Contribution Percentage (ACP) test fails.
When the ADP or ACP test fails, the most common correction method is refunding HCE contributions to the extent necessary to make the applicable test pass.
For 2023, an HCE is defined as an individual who meets one of the following two criteria:
- They own more than 5% of the employer (directly or by family attribution) at any time during 2022 or 2023.
- They received compensation in excess of $135,000 during 2022. A plan can limit this group to the top 20% of employees, ranked by compensation.