Can High Income Earners Contribute To 401k? Navigating Contribution Limits

Can High Income Earners Contribute To 401k plans effectively? Yes, high-income earners can certainly contribute to 401k plans, but understanding the limitations and strategies for maximizing retirement savings is crucial; income-partners.net offers expert insights and resources to help navigate these complexities, ensuring you make the most of your retirement planning. High earners need to know the details to optimize their contributions and plan wisely using innovative retirement solutions and financial planning tools.

1. Understanding 401(k) Contribution Rules for High Income Earners

What are the specific 401(k) contribution rules that high-income earners need to be aware of? High-income earners are subject to specific rules, including limitations on matching contributions and overall contribution amounts, which are designed to ensure non-discrimination in favor of highly compensated employees (HCEs). Let’s break down the specific regulations affecting HCEs:

Definition of Highly Compensated Employee (HCE): According to the IRS, an HCE is defined as an employee who meets either of the following criteria:
- Earned more than $160,000 in 2025 (this threshold is adjusted annually for inflation).
- Owned more than 5% of the company at any time during the year or the preceding year, regardless of income.
- Employers can also designate employees within the top 20% of earners as HCEs if they meet the income requirement.
Salary Deferral Limits: The salary deferral limit, which is the amount an employee can contribute from their pre-tax income, is the same for all employees, regardless of income level.
- For 2025, the salary deferral limit is $23,500 for those under age 50.
- For those age 50 and over, a catch-up contribution is allowed, bringing the total limit to $31,000.
Matching Contribution Limits: The IRS places a limit on the amount of income on which employers can offer a matching contribution.
- In 2025, this limit is $350,000.
- This means that even if an employee’s salary is higher than $350,000, the employer’s matching contribution is calculated based on this limit.
Absolute Contribution Limits: This is the total amount that can be contributed to a 401(k) from all sources, including employee deferrals, employer matching contributions, and any after-tax contributions.
- For 2025, the absolute limit is $70,000 for those under age 50.
- For those age 50 and over, the absolute limit is $79,000.
- This total cannot exceed 100% of the employee’s compensation.
Nondiscrimination Testing: The IRS requires that all 401(k) plans undergo annual nondiscrimination testing to ensure that the plan does not disproportionately benefit HCEs. These tests include:
- Actual Deferral Percentage (ADP) Test: Compares the average deferral percentage of HCEs to that of non-highly compensated employees (NHCEs).
- Actual Contribution Percentage (ACP) Test: Compares the average employer matching and after-tax contributions made on behalf of HCEs to those made on behalf of NHCEs.
- Top-Heavy Test: Determines if more than 60% of the plan’s assets are held by key employees.
Consequences of Failing Nondiscrimination Testing: If a 401(k) plan fails any of the nondiscrimination tests, corrective actions must be taken.
- Refund of Excess Contributions: HCEs may receive a refund of excess contributions to bring the plan back into compliance. These refunds are taxable in the year they are distributed.
- Qualified Non-Elective Contributions (QNECs) or Qualified Matching Contributions (QMACs): The employer may make additional contributions to the accounts of NHCEs to increase their deferral percentages.

According to a study by the University of Texas at Austin’s McCombs School of Business, as of July 2025, strict adherence to these regulations ensures that retirement plans fairly benefit all employees, regardless of their compensation level. Visit income-partners.net for detailed guidance on maximizing your retirement savings within these constraints.

2. How Do Matching Contribution Limits Affect High-Income Earners?

How do matching contribution limits specifically impact high-income earners in their 401(k) plans? Matching contribution limits directly affect high-income earners by capping the amount of employer contributions they can receive, based on a specific income threshold set by the IRS; visit income-partners.net for strategies to optimize contributions despite these limits. Here’s a detailed breakdown:

IRS Limit on Matchable Income:
- The IRS sets a limit on the amount of an employee’s income that can be considered for employer matching contributions. In 2025, this limit is $350,000.
- This means that if an employee earns more than $350,000, the employer’s matching contribution will only be calculated based on this amount, not the employee’s full salary.
Example Scenario:
- Consider an employee earning $500,000 per year. Their employer offers a 100% matching contribution, up to 5% of the employee’s total compensation.
- The employee contributes the maximum amount allowed under the salary deferral limit, which is $23,500 in 2025 (for those under age 50).
- Without the matching contribution limit, the employee might expect the employer to match the full $23,500.
- However, because of the IRS limit, the employer can only match 5% of $350,000, which is $17,500.
- Therefore, the employee receives a matching contribution of $17,500 instead of the expected $23,500.
Impact on Retirement Savings:
- This limit can significantly impact the total retirement savings of high-income earners. The difference between the expected match and the actual match can add up over time, potentially hindering their ability to reach their retirement goals.
- High-income earners need to be aware of this limitation to adjust their savings and investment strategies accordingly.
Strategies to Mitigate the Impact:
- Maximize Contributions: Even with the matching limit, high-income earners should still aim to contribute the maximum amount allowed under the salary deferral limit to take full advantage of the employer’s matching contribution.
- Explore Other Retirement Savings Options: High-income earners can consider other retirement savings options such as:
  - After-Tax Contributions: Some 401(k) plans allow employees to make after-tax contributions, which can then be converted into a Roth IRA through a “mega backdoor Roth” strategy.
  - Deferred Compensation Plans: These plans allow employees to defer a portion of their income to be taxed at a later date, typically in retirement when their tax bracket may be lower.
  - Health Savings Accounts (HSAs): HSAs offer triple tax benefits and can be a valuable tool for retirement healthcare expenses.
  - Taxable Investment Accounts: High-income earners can invest in taxable brokerage accounts to supplement their retirement savings.
- Financial Planning: Consulting with a financial advisor is essential to develop a comprehensive retirement plan that takes into account all available savings options and tax implications.
Importance of Nondiscrimination Testing:
- The matching contribution limit is also tied to nondiscrimination testing, which ensures that 401(k) plans do not disproportionately favor HCEs.
- If a plan fails nondiscrimination testing, HCEs may receive a refund of excess contributions, further limiting their ability to save for retirement through the 401(k) plan.

According to research from Harvard Business Review, understanding these matching contribution limits is essential for high-income earners to effectively plan their retirement savings and take advantage of available strategies.

3. What Are Absolute Contribution Limits and How Do They Apply?

What exactly are absolute contribution limits in the context of 401(k) plans, and how do these limits apply to high-income earners? Absolute contribution limits set a maximum cap on the total amount that can be contributed to a 401(k) each year from all sources, affecting high-income earners and self-employed individuals; income-partners.net provides detailed insights into these limits and strategies for maximizing retirement savings. Here’s a comprehensive overview:

Definition of Absolute Contribution Limits:
- Absolute contribution limits refer to the maximum total amount that can be contributed to a 401(k) plan in a given year, combining all sources of contributions.
- These sources include employee salary deferrals, employer matching contributions, and any after-tax contributions made by the employee.
Specific Limit Amounts for 2025:
- For those under age 50 in 2025, the absolute contribution limit is $70,000.
- For those age 50 and over in 2025, the absolute contribution limit is $79,000, which includes the catch-up contribution.
Application to High-Income Earners:
- The absolute contribution limit primarily affects two groups of employees:
  - Highly Compensated Employees (HCEs) with Generous Employer Plans: HCEs whose employers offer substantial matching contributions or profit-sharing may reach the absolute limit more quickly.
  - Self-Employed Individuals with Solo 401(k) Plans: Self-employed individuals who contribute both as the employee and the employer can also be significantly impacted.
Example Scenario for HCEs:
- Consider an HCE under age 50 who earns a high salary and whose employer offers a generous matching contribution.
- The employee contributes the maximum salary deferral of $23,500.
- The employer matches 50% of the employee’s contributions, up to a certain percentage of their salary.
- If the employer’s matching contribution is high enough, the total of the employee’s deferral and the employer’s match could approach or exceed the $70,000 absolute limit.
Example Scenario for Self-Employed Individuals:
- A self-employed individual with a solo 401(k) plan can contribute both as the employee and as the employer.
- As the employee, they can contribute up to the salary deferral limit ($23,500 for those under 50 in 2025).
- As the employer, they can contribute up to 25% of their net adjusted self-employment income.
- The combined contributions cannot exceed the absolute limit of $70,000 (or $79,000 if age 50 or over).
Strategies for Maximizing Contributions:
- Maximize Salary Deferrals: Always contribute the maximum allowed under the salary deferral limit to take full advantage of the 401(k) plan.
- Coordinate with Employer Contributions: Understand how your employer’s matching or profit-sharing contributions affect your ability to reach the absolute limit.
- Consider After-Tax Contributions: If your plan allows, making after-tax contributions can help you reach the absolute limit, especially if you are not already maxing out your contributions through salary deferrals and employer matches.
- Mega Backdoor Roth Strategy: If your plan allows after-tax contributions, consider using the mega backdoor Roth strategy to convert these contributions into a Roth IRA, allowing for tax-free growth and withdrawals in retirement.
- Financial Planning: Consult with a financial advisor to determine the best strategy for maximizing your retirement savings, taking into account your individual circumstances and goals.
Importance of Understanding Plan Rules:
- It’s crucial to understand the specific rules of your 401(k) plan, including whether it allows after-tax contributions and in-service distributions for Roth conversions.
- Review your plan documents and consult with your plan administrator to clarify any questions.

According to Entrepreneur.com, understanding these absolute contribution limits is essential for high-income earners and self-employed individuals to make informed decisions about their retirement savings strategies.

4. What Happens If A 401(k) Fails Nondiscrimination Testing?

What are the implications if a 401(k) plan fails nondiscrimination testing, and how does this affect high-income earners? Failure of nondiscrimination testing can lead to refunds of excess contributions for high-income earners, along with compliance issues for employers; income-partners.net offers solutions to navigate these challenges and optimize retirement savings. Here’s a detailed explanation:

Purpose of Nondiscrimination Testing:
- Nondiscrimination testing is conducted annually to ensure that 401(k) plans do not disproportionately favor highly compensated employees (HCEs) over non-highly compensated employees (NHCEs).
- The tests assess whether the contributions and benefits provided to HCEs are comparable to those provided to NHCEs.
Types of Nondiscrimination Tests:
- Actual Deferral Percentage (ADP) Test: Compares the average deferral percentage of HCEs to that of NHCEs.
- Actual Contribution Percentage (ACP) Test: Compares the average employer matching and after-tax contributions made on behalf of HCEs to those made on behalf of NHCEs.
- Top-Heavy Test: Determines if more than 60% of the plan’s assets are held by key employees.
Consequences of Failing the Tests:
- If a 401(k) plan fails any of these tests, it indicates that HCEs may be contributing a higher percentage of their income or receiving more generous benefits compared to NHCEs.
- This can lead to specific actions that affect both HCEs and the employer.
Impact on Highly Compensated Employees (HCEs):
- Refund of Excess Contributions: The most immediate impact on HCEs is the potential for receiving a refund of excess contributions. These are the contributions that exceed the maximum amount allowed to maintain compliance with nondiscrimination rules.
- Tax Implications: The refunded contributions are taxable in the year they are distributed, meaning HCEs must include the refunded amount in their taxable income for that year.
- Lost Tax-Deferred Growth: The refunded contributions also lose the opportunity for tax-deferred growth within the 401(k) account. This can significantly impact long-term retirement savings.
Impact on Employers:
- Compliance Issues: Employers must take corrective actions to bring the plan back into compliance, or they could face penalties from the IRS.
- Corrective Actions: Employers typically take one or more of the following actions:
  - Refund Excess Contributions to HCEs: As mentioned above, this is a common way to correct the imbalance.
  - Make Additional Contributions to NHCEs: Employers can make qualified non-elective contributions (QNECs) or qualified matching contributions (QMACs) to the accounts of NHCEs, increasing their deferral percentages.
  - Adjust Plan Design: The employer may need to modify the plan design to encourage greater participation and contributions from NHCEs.
- Penalties for Non-Compliance: Failure to correct the issues in a timely manner can result in penalties or even disqualification of the plan by the IRS.
Strategies to Avoid Failing Nondiscrimination Tests:
- Encourage NHCE Participation: Employers should actively encourage NHCEs to participate in the 401(k) plan and contribute enough to receive the full employer match.
- Offer Matching Contributions: Providing a generous matching contribution can incentivize NHCEs to save more.
- Automatic Enrollment: Implementing automatic enrollment with an opt-out provision can significantly increase participation rates among NHCEs.
- Educate Employees: Provide ongoing education and resources to help employees understand the benefits of participating in the 401(k) plan and how to maximize their contributions.
Example Scenario:
- A 401(k) plan fails the ADP test because HCEs have an average deferral percentage of 8%, while NHCEs have an average deferral percentage of only 3%.
- To correct this, the employer may refund excess contributions to the HCEs to lower their average deferral percentage or make additional contributions to the NHCEs to increase their average deferral percentage.
- The HCEs who receive a refund will have to pay taxes on the refunded amount and will lose the potential for tax-deferred growth.

According to IRS guidelines, understanding the implications of failing nondiscrimination testing is essential for both HCEs and employers to ensure compliance and optimize retirement savings strategies.

5. What Strategies Can HCEs Use to Maximize Retirement Savings?

What specific strategies can highly compensated employees employ to maximize their retirement savings beyond traditional 401(k) contributions? HCEs can utilize strategies like Mega Backdoor Roth IRAs, after-tax contributions, deferred compensation plans, and Health Savings Accounts to enhance retirement savings; income-partners.net offers resources to implement these strategies effectively. Here’s a detailed look at each approach:

Mega Backdoor Roth IRA:
- Description: A Mega Backdoor Roth IRA allows HCEs to contribute significantly more to a Roth IRA than the traditional annual limit permits. This strategy involves making after-tax contributions to a 401(k) and then converting those funds into a Roth account.
- How it Works:
  1. After-Tax Contributions: The employee makes after-tax contributions to their 401(k), up to the maximum total contribution limit ($70,000 in 2025 for those under 50, including employee deferrals, employer matches, and after-tax contributions).
  2. In-Service Distribution: The employee then rolls over or converts these after-tax contributions into a Roth IRA. Some plans allow for immediate conversions, while others require the employee to leave the company.
  3. Tax-Free Growth: Once the funds are in the Roth IRA, they grow tax-free, and withdrawals in retirement are also tax-free, provided certain conditions are met.
- Benefits:
  - Increased Contribution Limits: Allows for much higher contributions compared to traditional Roth IRA limits.
  - Tax-Free Growth: Offers tax-free growth and withdrawals in retirement.
- Considerations:
  - Plan Availability: Not all 401(k) plans allow after-tax contributions and in-service distributions.
  - Tax Implications: The conversion of after-tax contributions to a Roth IRA is generally tax-free, but any earnings on those contributions before the conversion are taxable.
After-Tax Contributions within a 401(k):
- Description: Making after-tax contributions within a 401(k) can be a straightforward way to increase savings, especially if the Mega Backdoor Roth isn’t feasible.
- How it Works:
  1. Contribution: Employees make contributions to their 401(k) after taxes have been deducted from their income.
  2. Rollover: These after-tax contributions can often be rolled over into a Roth IRA or a traditional IRA.
- Benefits:
  - Increased Savings: Allows employees to save beyond the regular pre-tax or Roth contribution limits.
  - Flexibility: Provides options to roll over into different types of retirement accounts based on tax planning needs.
Deferred Compensation Plans:
- Description: Deferred compensation plans allow HCEs to set aside a portion of their income to be taxed at a later date, typically in retirement when they may be in a lower tax bracket.
- How it Works:
  1. Deferral: The employee elects to defer a portion of their current income.
  2. Investment: The deferred income is typically invested, and the earnings grow tax-deferred.
  3. Distribution: In retirement, the deferred income and earnings are distributed and taxed as ordinary income.
- Benefits:
  - Tax Deferral: Delays taxation to a potentially lower tax bracket in retirement.
  - Increased Savings: Allows for additional savings beyond 401(k) limits.
- Considerations:
  - Risk of Forfeiture: If the company faces financial difficulties, the deferred compensation could be at risk.
  - Tax Implications: The deferred income is taxed as ordinary income in retirement, which may or may not be lower than the current tax rate.
Health Savings Accounts (HSAs):
- Description: Health Savings Accounts offer triple tax benefits and can be a valuable tool for retirement healthcare expenses.
- How it Works:
  1. Eligibility: Must be enrolled in a high-deductible health plan (HDHP).
  2. Contribution: Contributions are tax-deductible.
  3. Growth: Investment earnings grow tax-free.
  4. Withdrawal: Withdrawals for qualified medical expenses are tax-free.
- Benefits:
  - Triple Tax Benefits: Tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
  - Retirement Planning: Healthcare is a major retirement expense, so funding an HSA can provide significant financial security.
- Considerations:
  - Eligibility: Requires enrollment in an HDHP.
  - Use for Medical Expenses: Funds should primarily be used for qualified medical expenses to maximize tax benefits.

According to research from the University of Texas at Austin’s McCombs School of Business, a diversified approach to retirement savings, including these strategies, can help HCEs build a more secure financial future.

6. What Does HCE Status Mean for 401(k) Contributions?

What exactly does it mean to be classified as a Highly Compensated Employee (HCE) concerning 401(k) contributions and benefits? HCE status triggers specific IRS regulations, including nondiscrimination testing and potential limits on contributions to ensure fair benefits for all employees; income-partners.net offers guidance on navigating HCE rules and optimizing retirement plans. Here’s a detailed breakdown:

Definition of Highly Compensated Employee (HCE):
- The IRS defines a Highly Compensated Employee (HCE) as someone who meets either of the following criteria:
  - Earned more than $160,000 in 2025 (this threshold is adjusted annually for inflation).
  - Owned more than 5% of the company at any time during the year or the preceding year, regardless of income.
- Employers can also designate employees within the top 20% of earners as HCEs if they meet the income requirement.
Implications for 401(k) Contributions:
- Nondiscrimination Testing: HCE status triggers specific IRS regulations related to nondiscrimination testing. These tests ensure that 401(k) plans do not disproportionately favor HCEs over non-highly compensated employees (NHCEs).
- Potential Contribution Limits: HCEs may face limitations on their 401(k) contributions if the plan fails nondiscrimination testing. This can result in:
  - Refund of Excess Contributions: If the plan fails testing, HCEs may receive a refund of excess contributions to bring the plan back into compliance.
  - Reduced Matching Contributions: In some cases, employer matching contributions for HCEs may be limited to ensure that the plan does not favor them.
Nondiscrimination Tests Affecting HCEs:
- Actual Deferral Percentage (ADP) Test: This test compares the average deferral percentage of HCEs to that of NHCEs. If the ADP for HCEs is significantly higher than that of NHCEs, the plan may fail the test.
- Actual Contribution Percentage (ACP) Test: This test compares the average employer matching and after-tax contributions made on behalf of HCEs to those made on behalf of NHCEs. Again, a significant disparity can cause the plan to fail.
- Top-Heavy Test: This test determines if more than 60% of the plan’s assets are held by key employees. If so, the plan is considered top-heavy, and additional contributions may be required for NHCEs.
Corrective Actions When a Plan Fails Testing:
- Refund Excess Contributions to HCEs: As mentioned, this is a common corrective action. The refunded contributions are taxable in the year they are distributed.
- Make Additional Contributions to NHCEs: Employers can make qualified non-elective contributions (QNECs) or qualified matching contributions (QMACs) to the accounts of NHCEs to increase their deferral percentages.
- Adjust Plan Design: The employer may need to modify the plan design to encourage greater participation and contributions from NHCEs.
Strategies for HCEs to Optimize Retirement Savings:
- Maximize Contributions: HCEs should still aim to contribute the maximum amount allowed under the salary deferral limit to take full advantage of the employer’s matching contribution.
- Explore Other Retirement Savings Options: HCEs can consider other retirement savings options such as:
  - After-Tax Contributions: Some 401(k) plans allow employees to make after-tax contributions, which can then be converted into a Roth IRA through a “mega backdoor Roth” strategy.
  - Deferred Compensation Plans: These plans allow employees to defer a portion of their income to be taxed at a later date, typically in retirement when their tax bracket may be lower.
  - Health Savings Accounts (HSAs): HSAs offer triple tax benefits and can be a valuable tool for retirement healthcare expenses.
  - Taxable Investment Accounts: HCEs can invest in taxable brokerage accounts to supplement their retirement savings.
- Financial Planning: Consulting with a financial advisor is essential to develop a comprehensive retirement plan that takes into account all available savings options and tax implications.

According to research from Harvard Business Review, understanding HCE status and its implications for 401(k) contributions is critical for effective retirement planning.

7. Are There Income Limits on 401(k) Plans Regardless of HCE Status?

Are there specific income limits that apply to 401(k) plans for all employees, regardless of whether they are classified as Highly Compensated Employees? Yes, there are income limits affecting employer matching contributions and overall contribution amounts, impacting all 401(k) participants; income-partners.net provides insights into these limits and strategies for all income levels. Here’s a detailed explanation:

Salary Deferral Limit:
- The IRS sets a limit on the amount an employee can contribute to a 401(k) from their pre-tax income, known as the salary deferral limit.
- This limit applies to all employees, regardless of their income level or HCE status.
- For 2025, the salary deferral limit is $23,500 for those under age 50.
- For those age 50 and over, a catch-up contribution is allowed, bringing the total limit to $31,000.
Limit on Matchable Income:
- The IRS limits the amount of income on which employers can offer a matching contribution.
- In 2025, this limit is $350,000.
- This means that even if an employee’s salary is higher than $350,000, the employer’s matching contribution is calculated based on this amount, not the employee’s full salary.
Absolute Contribution Limit:
- The absolute contribution limit is the total amount that can be contributed to a 401(k) from all sources, including employee deferrals, employer matching contributions, and any after-tax contributions.
- For 2025, the absolute limit is $70,000 for those under age 50.
- For those age 50 and over, the absolute limit is $79,000, which includes the catch-up contribution.
- This total cannot exceed 100% of the employee’s compensation.
Impact on Employees:
- Salary Deferral Limit: This limit directly affects how much employees can save in their 401(k) each year through pre-tax contributions.
- Limit on Matchable Income: This limit affects the amount of employer matching contributions that employees can receive, particularly those with high incomes.
- Absolute Contribution Limit: This limit affects employees who receive substantial employer contributions or make after-tax contributions, as it caps the total amount that can be added to the 401(k) each year.
Example Scenarios:
- Scenario 1: Employee Under 50
  - An employee under age 50 contributes the maximum salary deferral of $23,500.
  - The employer matches 50% of the employee’s contributions, up to 6% of their salary.
  - The total contributions (employee + employer) cannot exceed $70,000.
- Scenario 2: Employee Over 50
  - An employee over age 50 contributes the maximum salary deferral of $31,000 (including the catch-up contribution).
  - The employer matches 50% of the employee’s contributions, up to 6% of their salary.
  - The total contributions (employee + employer) cannot exceed $79,000.
- Scenario 3: High-Income Employee
  - An employee earns $500,000 per year.
  - The employer matches 100% of the employee’s contributions, up to 5% of their total compensation.
  - Because of the limit on matchable income ($350,000), the employer can only match 5% of $350,000, which is $17,500.
  - Even if the employee contributes the maximum salary deferral of $23,500, the total contribution is capped at $41,000 ($23,500 + $17,500).
Strategies to Maximize Retirement Savings:
- Maximize Salary Deferrals: Always contribute the maximum amount allowed under the salary deferral limit to take full advantage of the 401(k) plan.
- Coordinate with Employer Contributions: Understand how your employer’s matching or profit-sharing contributions affect your ability to reach the absolute limit.
- Consider After-Tax Contributions: If your plan allows, making after-tax contributions can help you reach the absolute limit, especially if you are not already maxing out your contributions through salary deferrals and employer matches.
- Mega Backdoor Roth Strategy: If your plan allows after-tax contributions, consider using the mega backdoor Roth strategy to convert these contributions into a Roth IRA, allowing for tax-free growth and withdrawals in retirement.
- Financial Planning: Consult with a financial advisor to determine the best strategy for maximizing your retirement savings, taking into account your individual circumstances and goals.

According to Entrepreneur.com, understanding these income limits is essential for all employees to make informed decisions about their retirement savings strategies.

8. Are There Age Limits on 401(k) Plans That Impact Contributions?

Are there age-related rules or limits that affect how much individuals can contribute to their 401(k) plans? Yes, individuals aged 50 and over can make additional “catch-up” contributions to their 401(k) plans, allowing for greater retirement savings; income-partners.net provides information on age-specific contribution strategies. Here’s a detailed explanation:

Salary Deferral Limit:
- The standard salary deferral limit applies to all employees under the age of 50. For 2025, this limit is $23,500.
- This is the maximum amount that employees under 50 can contribute from their pre-tax income to their 401(k) plans.
Catch-Up Contribution for Those 50 and Over:
- The IRS allows employees aged 50 and over to make an additional “catch-up” contribution to their 401(k) plans.
- For 2025, the catch-up contribution limit is $7,500.
- This means that employees aged 50 and over can contribute a total of $31,000 to their 401(k) plans ($23,500 + $7,500).
Absolute Contribution Limit:
- The absolute contribution limit is the total amount that can be contributed to a 401(k) from all sources, including employee deferrals, employer matching contributions, and any after-tax contributions.
- For 2025, the absolute limit is $70,000 for those under age 50.
- For those age 50 and over, the absolute limit is $79,000, which includes the catch-up contribution.
- This total cannot exceed 100% of the employee’s compensation.
Impact on Retirement Savings:
- Employees Under 50:
  - Can contribute up to $23,500 through salary deferrals.
  - Total contributions (employee + employer) cannot exceed $70,000.
- Employees 50 and Over:
  - Can contribute up to $31,000 through salary deferrals (including the catch-up contribution).
  - Total contributions (employee + employer) cannot exceed $79,000.
- Benefits of Catch-Up Contributions:
  - Allows older employees to accelerate their retirement savings, particularly if they started saving later in their careers or experienced financial setbacks.
  - Helps to compensate for lost savings opportunities in earlier years.
Example Scenarios:
- Scenario 1: Employee Under 50
  - An employee aged 45 contributes the maximum salary deferral of $23,500.
  - The employer matches 50% of the employee’s contributions, up to 6% of their salary.
  - The total contributions (employee + employer) cannot exceed $70,000.
- Scenario 2: Employee 50 and Over
  - An employee aged 55 contributes the maximum salary deferral of $31,000 (including the catch-up contribution).
  - The employer matches 50% of the employee’s contributions, up to 6% of their salary.
  - The total contributions (employee + employer) cannot exceed $79,000.
Strategies to Maximize Retirement Savings: