The Internal Revenue Service (IRS) sets limits on 401(k) contributions and compensation each year. Because contributing to a 401(k) plan is a tax benefit, the IRS limits how much each participant and plan can get. These limits apply to all plans, including those with a safe harbor provision.
The annual deferral limit, also known as the 402(g) limit, is the maximum amount you can personally contribute (defer) into any plan as a salary reduction election.
This limit includes all amounts deferred into any 401(k), 403(b), or SIMPLE 401(k) plan, regardless of the plan sponsor. It also includes both pre-tax and Roth contributions.
Note: If you are 50 or older, you may be eligible for additional catch-up contributions. Under the SECURE 2.0 Act, participants who turn 60 – 63 during the plan year may qualify for a higher catch-up limit.
The annual additions limit, also known as the 415 limit, is the combined limit of employee salary reduction elections and employer contributions (like match and non-elective contributions) that can go into an account during a plan year.
This limit applies per plan sponsor and combines contributions across employers in the same controlled group or affiliated service group. However, it does not combine contributions for participants in separate plans sponsored by unrelated employers.
Most employer contributions equal a percentage of compensation. For example, a non-elective contribution of 3% of compensation, or a 100% match on deferrals up to 4% of compensation.
The annual compensation limit, also known as the 401(a)(17) limit, caps the compensation you can count when calculating employer contributions.
The employer deduction limit is the maximum total contributions an employer can make to the plan as a whole. Plans that exceed this limit can face large penalties.
While Gusto Retirement monitors these limits using available data, you need to also track your own limits. This is especially important during transitions like changing payroll providers or converting to Gusto Retirement from another service provider.
Learn more about plan compliance testing and limits.