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Do Employer Contributions Count Towards Max?

Published in 401(k) Contributions 2 mins read

No, employer contributions do not count towards your personal elective deferral limit for your 401(k) or similar retirement plan. This distinction is crucial for understanding how much you can personally save for retirement.

Understanding 401(k) Contribution Limits

When it comes to 401(k) plans, there are typically two main limits set by the Internal Revenue Service (IRS) that are important to distinguish:

  • Employee Elective Deferral Limit: This is the maximum amount you can contribute from your paycheck to your 401(k) in a given year. Employer contributions, such as matching contributions or profit-sharing contributions, do not count against this specific limit. This limit is the maximum you are allowed to contribute as an employee, allowing you to maximize your personal savings regardless of your employer's generosity.
  • Overall 401(k) Contribution Limit: This is a much higher limit that encompasses the total contributions made to your 401(k) in a year from all sources: your own elective deferrals, your employer's matching contributions, and any other employer contributions (like profit-sharing).

This separation means that even if your employer contributes a significant amount to your 401(k), you can still contribute up to the maximum employee elective deferral limit without being restricted by their contributions.

Practical Implications and Examples

To illustrate, let's consider the IRS limits for 2024 (these figures are subject to change annually, so it's always good to check the latest IRS guidelines):

Contribution Type 2024 Limit (Under Age 50) 2024 Limit (Age 50 or Over - Catch-Up)
Employee Elective Deferral \$23,000 \$30,500 (\$23,000 + \$7,500 catch-up)
Overall 401(k) Contribution \$69,000 \$76,500 (\$69,000 + \$7,500 catch-up)

Example:

Let's say you are 40 years old in 2024:

  • You can personally contribute up to \$23,000 to your 401(k) from your salary.
  • If your employer contributes an additional \$10,000 as a match or profit-sharing, your total contribution for the year would be \$23,000 (your contribution) + \$10,000 (employer contribution) = \$33,000.
  • This combined total of \$33,000 is well within the overall 401(k) contribution limit of \$69,000, and your personal contribution of \$23,000 has met your individual elective deferral maximum.

This structure encourages employers to contribute to their employees' retirement savings without penalizing employees who wish to maximize their personal contributions. It allows you to leverage both your own savings efforts and your employer's generosity to build a robust retirement nest egg.

For the most current contribution limits and detailed guidance, you can refer to the official IRS website or consult with a qualified financial advisor.