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[topic 5]
A There are three different federally mandated limitations as to how much an employee can contribute to his or her 401(k) plan annually, and how much the employer can likewise contribute to the company's plan..
I. 401k Plan Participant Limitation
-- Currently a 401(k) plan participant can elect to have up to $15,000 deducted from his or her earnings contributed to the 401(k). If the plan participant is 50 years or older, an additional
$5,000 per year may be contributed. The amount the government allows be voluntary contributed by a worker has been steadily increasing over the past decade, and this increase in the limit is expected to continue.
-- Examples: (1) An employee joins the company's 401k and earns $10,000 for the year -- the entire $10,000 can be contributed to the plan by this employee. (2) An employee earns
$2,000,000 and wants to contribute the maximum -- the maximum that this employee can contribute is
$15,000.
II. 415 Limitation
-- The 415 limitation is an overall limit on the maximum amount that can be added to a 401k plan participant's account during the year from all sources. The 415 limit includes the employee's voluntary payroll deduction (which is limited to a maximum of
$15,000), combined with any matching or profit sharing or other contribution(s) made into the participant's account by the employer. The current 415 limitation is equal either the employees total compensation for the year OR
$44,000, whichever is less.
-- Examples: (1) An employee earns $10,000 and joined the companies 401(k). This employee contributes
$2,500 to the plan, and employer matches the employee at 50-cents to the dollar contributed. The employer provides this employee with a $1,250 matching contribution. (2) An employee earns
$2,000,000 a year and contributes the maximum amount of
$15,000 to the 401k. The employer has a very generous matching program, wherein the employee will contribute $5 for every dollar contributed by an employee. The most that this employee can have contributed to the 401(k) is
$44,000 despite the fact that the $15,000 voluntary contribution calculates to a
$75,000 employer match.
III. 404 Limitation
-- The 404 limitation controls the maximum dollar amount an employer can contribute to the company's plan during the year. Employer contribution can be in various forms, including profit-sharing and matching contributions. The 404 limitation can not exceed 25% of the company's payroll (total amount of all employees' compensations), prior to an employee deferrals, with the following stipulations: The employees' compensations used in the calculation must be eligible to participate in the 401k, and wages in excess of
$220,000 cannot be factored into the calculation.
-- Examples: (1) A company with 10 employees has an annual gross payroll of $1,000,000. No employee earns more than $2000,000 per year. The most that the employer can contribute to the 401(k) is $250,000 across all participants.
(2) A company with 3 employees has a gross payroll of $600,000. Employee A
earns $200,000, Employee B earns $250,000, and Employee C earns
$150,000. The rule 404 calculation can only recognize the first $220,000 of Employee
B's compensation, thus reducing the eligible payroll to $570,000 instead of
$600,000.
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