Is There a Limit on Employer Contributions to a 401(k)?

Employer 401(k) contributions are usually limited by their matching and profit-sharing calculations. Read on for more information about the factors that go into how much employers can contribute to a plan each year.

Adoption Agreement

The adoption agreement of the 401(k) will dictate the plan design and how the employer will contribute to the plan. This information can be found in the summary plan description as well.

It’s common for a company to match at 3% or 4% of an employee’s W2 compensation. They have the option to contribute more than this amount.

In order to receive the match, the participant will usually have to contribute up to the matching component.

There is a feature called a non-elective match where the employer will fund 3% for all eligible participants, even if they are not participating. It just depends on the plan.

401(k) Matching Examples

  • The company will match 100% up to 3%.
  • The company will match 100% up to 3%, with an additional 0.5% on the next 2%. This means if you contribute 5% you’ll receive a 4% match.
  • The company will match 100% up to 6%.

Matches can increase based on your years of service for the company, should the plan allow for it.

Profit-Sharing Plan

401(k) plans will allow for an option profit-sharing contribution. This allows for additional contributions to the plan in addition to the match.

These are usually optional on the employer’s end. If cash flow is tight for one year, they can decide not to fund the plan.

These can be a flat percentage for all participants, such as an additional 10% to all participant’s 401k.

You can also have this weighted more heavily towards the owners. They will calculate the profit-sharing contribution based on age, salary, and years of service.

2021 and 2020 Annual 401(k) Contribution Limits Per the IRS

Salary deferrals – $19,500 in 2020 and 2021 ($19,000 in 2019), plus $6,500 in 2020 and 2021 ($6,000 in 2015 – 2019) if the employee is age 50 or older (IRC Sections 402(g) and 414(v))

Annual compensation – $290,000 in 2021, $285,000 in 2020, $280,000 in 2019 (IRC Section 401(a)(17))

Total employee and employer contributions (including forfeitures) – the lesser of 100% of an employee’s compensation or $58,000 for 2021 ($57,000 for 2020 not including “catch-up” elective deferrals of $6,500 in 2020 and 2021 ($6,000 in 2015 – 2019) for employees age 50 or older) (IRC section 415(c))

The maximum contributions to all retirement plans from all sources is $58,000 (under 50) or $63,500 (over 50). This includes the employer contributions even if you have multiple employers.

If you’d like an objective second opinion about your finances, please contact Michael Shea, a CERTIFIED FINANCIAL PLANNER™, at Applied Capital. Email him at [email protected] or fill out a contact form.

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This blog is provided for informational purposes only. Such views are subject to change at any point without notice. The information in the blog should not be considered investment or tax advice or a recommendation to buy or sell any types of securities. Some of our blogs or information therein have been obtained from third party sources believed to be reliable but such information is not guaranteed. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.

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