401(k) plans are the most common employer-sponsored benefit plan. These defined contribution plans feature tax-deferred gains, a partial employer match, and lean heavily on employee contributions. There are annual contribution limits to a 401(k) plan, which are generally well understood. Highly compensated employees may face additional contribution restrictions they may be unaware of, but there are ways to navigate these restrictions.

401(k) Contribution Limits: All Employees

For the majority of earners, it is generally known that the maximum yearly employee contribution for an employer-sponsored 401(k) plan is $20,500 (for 2022) or $27,000 if eligible for the ‘catch-up provision’ (for those age 50 or older in 2022). These amounts are highly publicized with the employer as well as the 401(k) administrator.

Maximum Includable Compensation for 401(k) Contributions

What may not be common knowledge is the IRS limit on maximum includable compensation. The provision under IRS Section 401(a)(17) places a cap on the amount of an employee’s income that can be used to determine their contribution or match amount. Compensation is capped at $305,000 per year in 2022.

Does this mean that an individual can’t contribute to a 401(k) if he or she earns more? Absolutely not! It simply means that any amount over $305,000 will not apply for eligible contributions.

Read the full article on the PBMares Wealth Management website.