The annual compensation limit, also known as the 401(a)(17) limit, caps the amount of an employee's pay that can be used to calculate the employer's nonelective contribution or match to a Gusto 401(k). This limit is set by law, and the Internal Revenue Service (IRS) may adjust it each year. For highly paid employees, this limit directly affects how much of the employer's contributions they can get for the year. This article explains the current limit and how it's applied.
The annual compensation limit is $360,000 for 2026.
Example of how this limit applies in 2026:
Say an employee earns $500,000 in 2026, and the company's 401(k) plan provides a match of 100% of employee deferrals up to a maximum of 5% of compensation. The company matching contributions would be capped at $18,000 (5% x $360,000), rather than $25,000 (5% x $500,000). The remaining $140,000 of 2026 compensation would not be taken into account for any purpose under the plan.
All employer contributions for a single year must be determined by taking into account only the amount of a participant's compensation up to the compensation limit for that year. Employer contributions may include profit-sharing, non-elective, safe-harbor, and matching contributions.
Similarly, where applicable in performing the nondiscrimination testing (for example, the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests) for a single year, each participant's reported compensation must be capped at the compensation limit. Only compensation up to that year's dollar amount will be applied in performing these tests.
For new plans with short plan years (that do not begin on Jan. 1), the annual compensation limit must be prorated based on the number of full months in the short plan year.
Visit the IRS site to learn more.