Is there a % of wages legal limit on 401(k) plan contributions?

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userwithconcern
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Is there a % of wages legal limit on 401(k) plan contributions?

Post by userwithconcern »

Is there a % of compensation that is allowed to be contributed to a 401(k) plan (elective deferrals, after-tax contributions)?

How about for employer match? This site says:

https://ira123.com/solo-401k-contribution-limits/

> A profit-sharing contribution of up to 25% of W-2 earnings can be contributed into a Solo 401(k).

Does this also apply to a typical big company 401(k)?
Soon2BXProgrammer
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by Soon2BXProgrammer »

userwithconcern wrote: Wed Jul 21, 2021 5:47 pm Is there a % of compensation that is allowed to be contributed to 401(k)?

How about employer match? This site says:

https://ira123.com/solo-401k-contribution-limits/

> A profit-sharing contribution of up to 25% of W-2 earnings can be contributed into a Solo 401(k).

Does this also apply to a typical big company 401(k)?
EmployEE 401k deferrals are limited by multiple testing rules to make sure that highly compensated employees do not save significantly more then rank-and-file employees. Plan administrators have to set their contributions limits to something that they think will pass testing, or they will have to make corrective distributions (this might not be the right term).
Last edited by Soon2BXProgrammer on Wed Jul 21, 2021 5:51 pm, edited 1 time in total.
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userwithconcern
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by userwithconcern »

Assume the question is only for non-HCEs (non-highly compensated employees).
Soon2BXProgrammer
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by Soon2BXProgrammer »

userwithconcern wrote: Wed Jul 21, 2021 5:50 pm Assume the question is only for non-HCEs (non-highly compensated employees).
The limit is plan wide, so if they plan administrators set it to 10% to limit highly compensated, then the 10% applies to non-highly compensated, most of the time but not always. I have seen in some plans where some segments of employees have different limits then other employees.
Last edited by Soon2BXProgrammer on Wed Jul 21, 2021 5:54 pm, edited 1 time in total.
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Normchad
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by Normchad »

userwithconcern wrote: Wed Jul 21, 2021 5:50 pm Assume the question is only for non-HCEs (non-highly compensated employees).
I can set my deferral up to 80% in my employers plan. I’ve never tried it though……

If I retire early next year, I will do that and get as much shoved into the plan as I can.
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userwithconcern
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by userwithconcern »

Soon2BXProgrammer wrote: Wed Jul 21, 2021 5:52 pm
userwithconcern wrote: Wed Jul 21, 2021 5:50 pm Assume the question is only for non-HCEs (non-highly compensated employees).
The limit is plan wide, so if they plan administrators set it to 10% to limit highly compensated, then the 10% applies to non-highly compensated, most of the time but not always. I have seen in some plans where some segments of employees have different limits then other employees.
I did state in the title that it is a legal limit, rather than a plan-imposed limit that I am trying to understand.
exodusNH
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by exodusNH »

userwithconcern wrote: Wed Jul 21, 2021 5:47 pm Is there a % of compensation that is allowed to be contributed to a 401(k) plan (elective deferrals, after-tax contributions)?

How about for employer match? This site says:

https://ira123.com/solo-401k-contribution-limits/

> A profit-sharing contribution of up to 25% of W-2 earnings can be contributed into a Solo 401(k).

Does this also apply to a typical big company 401(k)?
It's complicated. There isn't necessarily a max percent you can contribute in law, mostly dollar figures. Plans are often more restrictive than the law requires.
exodusNH
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by exodusNH »

userwithconcern wrote: Wed Jul 21, 2021 5:56 pm
Soon2BXProgrammer wrote: Wed Jul 21, 2021 5:52 pm
userwithconcern wrote: Wed Jul 21, 2021 5:50 pm Assume the question is only for non-HCEs (non-highly compensated employees).
The limit is plan wide, so if they plan administrators set it to 10% to limit highly compensated, then the 10% applies to non-highly compensated, most of the time but not always. I have seen in some plans where some segments of employees have different limits then other employees.
I did state in the title that it is a legal limit, rather than a plan-imposed limit that I am trying to understand.
There is no one-line answer. There are per-person limits of $19.5K/26.5K per person plus whatever is allowed for after-tax (i.e megabackdoor Roth.) But how that plays with the various legal tests is difficult to answer since it depends on how everyone else is contributing.
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by RickBoglehead »

There is no percent limit to retirement accounts that I have ever read about. My wife contributed over 70% of her gross, leaving zero net after FICA, health plan premium, and required 457 contribution.
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Normchad
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by Normchad »

I believe the IRS also has a limit of how much pay is considered eligible compensation for a 401K plan. I think it’s around 300K or something. So if you make more than that, adjust accordingly.
quantAndHold
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by quantAndHold »

My megacorp’s limit was 100%. The year I retired, I set it to 100%, maxed out my 401k for the year before the end of January, and then quit.
Yes, I’m really that pedantic.
tonyclifton
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by tonyclifton »

Your 401k provider's website should have your plan summary and plan documents that should clearly define the maximum contributions that your employer's plan allows. These documents are customized and specific to your plan. My company's plan does not have a percentage but does have a maximum dollar amount for 401k and Roth 401k combined contributions. If your 401k provider's website does not have these documents then your HR department or 401k plan administrator will have them.
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by Soon2BXProgrammer »

userwithconcern wrote: Wed Jul 21, 2021 5:56 pm
Soon2BXProgrammer wrote: Wed Jul 21, 2021 5:52 pm
userwithconcern wrote: Wed Jul 21, 2021 5:50 pm Assume the question is only for non-HCEs (non-highly compensated employees).
The limit is plan wide, so if they plan administrators set it to 10% to limit highly compensated, then the 10% applies to non-highly compensated, most of the time but not always. I have seen in some plans where some segments of employees have different limits then other employees.
I did state in the title that it is a legal limit, rather than a plan-imposed limit that I am trying to understand.
What I'm saying is the plan has to pass ADP/ACP testing, which is a legal limit. In order to do that, sometimes plans have to set a plan limit as a percentage of salary.
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Grogs
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by Grogs »

quantAndHold wrote: Wed Jul 21, 2021 6:20 pm My megacorp’s limit was 100%. The year I retired, I set it to 100%, maxed out my 401k for the year before the end of January, and then quit.
I've heard a couple of other people saying they were able to set theirs to 100%, so I'm pretty sure the answer to that question is that there is no hard limit imposed by law.

As a practical matter, there are probably very few circumstances where someone could actually contribute 100%. Things like SS, Medicare, and medical premiums need to be taken out first. I think that's why most companies impose a cap like 80% just to make things easier to calculate.
Statistical
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by Statistical »

Employee deferral limit is the lesser of $19,500 or 100% of earned income from that employer for all employee deferral to all plans for that employer (except 457 which has its own limit)
Overall 415 limit is the lesser of $58,000 or 100% of earned income from that employer for all contributions to all plans for that employer.

Separately there is also an overall limit of $19,500 or 100% of all earned income across all employers.
Last edited by Statistical on Wed Jul 21, 2021 9:05 pm, edited 1 time in total.
quantAndHold
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by quantAndHold »

Grogs wrote: Wed Jul 21, 2021 7:56 pm
quantAndHold wrote: Wed Jul 21, 2021 6:20 pm My megacorp’s limit was 100%. The year I retired, I set it to 100%, maxed out my 401k for the year before the end of January, and then quit.
I've heard a couple of other people saying they were able to set theirs to 100%, so I'm pretty sure the answer to that question is that there is no hard limit imposed by law.

As a practical matter, there are probably very few circumstances where someone could actually contribute 100%. Things like SS, Medicare, and medical premiums need to be taken out first. I think that's why most companies impose a cap like 80% just to make things easier to calculate.
I believe in my case, payroll taxes and life/health/disability insurance premiums came out first, then the rest went into the 401k.
Yes, I’m really that pedantic.
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by JDCarpenter »

When I was working "half time" for a university 20 to 15 years ago, I was able to set my 403b contributions at 90% of gross so as to maximize my annual contributions. Obviously, as an individual, I was not highly compensated employee.... (DW OTOH, was at her medical group, but that didn't impact my contributions with an unrelated employer)

So agree with others, no direct legal limit.
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Normchad
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by Normchad »

Soon2BXProgrammer wrote: Wed Jul 21, 2021 6:56 pm
userwithconcern wrote: Wed Jul 21, 2021 5:56 pm
Soon2BXProgrammer wrote: Wed Jul 21, 2021 5:52 pm
userwithconcern wrote: Wed Jul 21, 2021 5:50 pm Assume the question is only for non-HCEs (non-highly compensated employees).
The limit is plan wide, so if they plan administrators set it to 10% to limit highly compensated, then the 10% applies to non-highly compensated, most of the time but not always. I have seen in some plans where some segments of employees have different limits then other employees.
I did state in the title that it is a legal limit, rather than a plan-imposed limit that I am trying to understand.
What I'm saying is the plan has to pass ADP/ACP testing, which is a legal limit. In order to do that, sometimes plans have to set a plan limit as a percentage of salary.
A lot of companies switched to "safe harbor" plans to get around this. My company certainly did..... IF they didn't, that might be enough reason to look around for a new job.
A Safe Harbor plan is a special kind of 401(k) that automatically satisfies most nondiscrimination testing. It has certain built-in elements that are intended to help employees save by requiring companies to contribute to their employees’ 401(k) accounts. When employers take this step to encourage more employees to participate, the IRS offers them “safe harbor” from both the nondiscrimination testing process and the consequences of failure.
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teen persuasion
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by teen persuasion »

At a former employer, DH asked what the max % to 401k was - we needed to exceed 50% to max it, weren't sure how high was ok. They told him max was 100%.

I have contributed 100% (but after FICA, etc) to my SIMPLE IRA, when we started a new plan mid-year, to get as close to max as possible. I think a coworker in the final push to retire just did the same.
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by FiveK »

userwithconcern wrote: Wed Jul 21, 2021 5:47 pm Is there a % of compensation that is allowed to be contributed to a 401(k) plan (elective deferrals, after-tax contributions)?
As others have noted, the IRS imposes no such limit. Many years ago (1980s?) there was such a limit, but not now.

The IRS does allow companies to set such a limit, and some do, even though it may make no sense. E.g., company has a Safe Harbor 401(k) but still imposes something like a 25% of income cap. That allows HCEs to contribute the IRS max of $19.5K, but not anyone making less than $78K.
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by Soon2BXProgrammer »

FiveK wrote: Wed Jul 21, 2021 11:26 pm
userwithconcern wrote: Wed Jul 21, 2021 5:47 pm Is there a % of compensation that is allowed to be contributed to a 401(k) plan (elective deferrals, after-tax contributions)?
As others have noted, the IRS imposes no such limit. Many years ago (1980s?) there was such a limit, but not now.

The IRS does allow companies to set such a limit, and some do, even though it may make no sense. E.g., company has a Safe Harbor 401(k) but still imposes something like a 25% of income cap. That allows HCEs to contribute the IRS max of $19.5K, but not anyone making less than $78K.
It should be known there are quite a few megacorps that look like they have a Safe Harbor because of generous matches, but they don't' actually have a safe harbor plan... How so? because they might have segment of their workers in low paid areas that they don't give the generous matches to.. This means they actually are using the income cap to help manage plan testing.
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Lionel Hutz
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by Lionel Hutz »

OP: no, as far as I’m aware there is no % of wage limit the government imposes. This assumes those other factors discussed above (plan limit, etc) are not part of the equation.

Simple example: someone who makes $19,500 annually (under 50, no after tax) could contribute 100% of their salary to their megacorp 401k theoretically.
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by Eagle33 »

quantAndHold wrote: Wed Jul 21, 2021 6:20 pm My megacorp’s limit was 100%. The year I retired, I set it to 100%, maxed out my 401k for the year before the end of January, and then quit.
How did you pay your payroll taxes if you contributed 100% of your gross pay to your 401k?
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by yatesd »

Slightly off topic, but I was the 401K admin for our 50 employee company. It was very frustrating jumping through the hoops that government applied in the name of fairness.

- I switched our plan from a high fee over to Vanguard (ascensus, their small business plan)
- My intent was to convince our company to start matching. Start at 1% and increment up as cash flow allowed. Never happened. There were weird rules where it was a minimum of 3% unless you wanted to go through extensive testing.
- One year I believe I had to remove money from the plan. I believe I may have hit one of the high comp rules
- The admin burden for managing was more than I anticipated, I do believe there should be an “easy version” to encourage all companies to offer at least something.
MathWizard
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by MathWizard »

It has to be deferred salary, so it can't be 100%
The company will withhold for
SS and medicare, based on your whole salary, and
income taxes, both federal and state.


So maybe 90%

My wife had somewhat variable income, so we took 11,800 out of 17K total income. (Teacher's aids are paid horribly.)

This kept up out of the 22% bracket though.
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by w5000 »

Seems like responses here are mixing two different issues.

First is hitting the annual deferral limit of $19,500. I don't think companies can tell employees that they can't contribute more than X% of their salary on a yearly basis -- I think everyone is allowed to max out that contribution, regardless of whether that's 25% of your salary or 1%. Of course, as folks have pointed out, if the plan fails the compliance tests, then usually contributions from "highly compensated employees" are returned to those employees, in amounts enough to make the plan pass the tests.

The second is how much of a single paycheck you are permitted to defer to a 401(k). This depends on your plan -- the summary plan description should tell you the maximum. At my current company, this is 100%. At a previous company the limit was 50%. I learned this at this previous company when I was preparing to leave mid-year for a startup with no retirement plan. I wanted to max out my 401(k), but I was only able to defer 50% of my paycheck for my last few paychecks with them.
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FiveK
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by FiveK »

w5000 wrote: Thu Jul 22, 2021 8:31 pm Seems like responses here are mixing two different issues.

First is hitting the annual deferral limit of $19,500. I don't think companies can tell employees that they can't contribute more than X% of their salary on a yearly basis....
Unfortunately, companies can impose such a limit - and some do.

The law sets the maximum a plan can allow, but also allows plans to set a lower maximum.
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by pindevil »

Just another data point. DW sets hers to the max which is 60% through the employer plan. Although I don't know who determined 60% is the max. It would be nice if we could do more.
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teen persuasion
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Re: Is there a % of wages legal limit on 401(k) plan contributions?

Post by teen persuasion »

yatesd wrote: Thu Jul 22, 2021 5:04 pm Slightly off topic, but I was the 401K admin for our 50 employee company. It was very frustrating jumping through the hoops that government applied in the name of fairness.

- I switched our plan from a high fee over to Vanguard (ascensus, their small business plan)
- My intent was to convince our company to start matching. Start at 1% and increment up as cash flow allowed. Never happened. There were weird rules where it was a minimum of 3% unless you wanted to go through extensive testing.
- One year I believe I had to remove money from the plan. I believe I may have hit one of the high comp rules
- The admin burden for managing was more than I anticipated, I do believe there should be an “easy version” to encourage all companies to offer at least something.
There IS an "easy version" to encourage all companies to offer at least something, a SIMPLE IRA. But it's not a 401k, so it's somewhat similar, somewhat different.

Biggest differences: lower contribution limits, no Roth component, and - it's an IRA, so interferes with backdoor Roth IRA if you need to go that route.
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