[Updated for 2021 and estimated 2022 limits] I recently received a few questions regarding 401k retirement plans and contribution limits. The first thing to understand is that there are two main types of contributions that go into these plans. One is your (as a worker or employee) contribution, or elective deferral, and the other is your employers, or maximum matching contribution.
Secondly there are four annual contribution limits you need to be aware of : Your employee contribution (elective deferral) limit, catch-up contribution limits (for those over 50), employer contribution limits and maximum annual contribution limits. These are set by the IRS every year based on cost of living adjustments.
Per the table below the maximum employee (elective deferral) annual contribution limit across all 401k and 403b plans was $19,500 in 2021. This is expected to increase to $20,000 in 2022.
The maximum annual contribution for 2021 rose to $58,000 ($59,000 is the projected 2022 level) which includes elective deferrals, employer matching and discretionary contributions, but excludes catch-up contributions for those over 50.
The catch-up contribution also remained unchanged at $6,500 (as is expected to be the case in 2022). In addition, the amount of employee compensation (especially for higher income earners) that can be taken into account when determining employer and employee contributions is $290,000 for this year.
Maximum Employer contribution limits. Matching 401K or 403b contributions made by your employer are not counted towards your annual contribution limit or 100% of your salary, whichever is the smaller amount. But do count towards the maximum annual contribution limit that includes employee and employer contributions. Though most employers rarely give anywhere near the maximum, most generally match 3% to 6% of employee contributions.
Catch-up contributions. If you are age 50 or over at the end of the calendar year, you are permitted to make additional, “catch-up”, elective deferral contributions. These catch-up contributions are not subject to the annual general limits that apply to 401k plans. The catch-up contribution you can make for a year cannot exceed the lesser of the annual catch-up contribution limit, or the excess of your compensation over the elective deferrals that are not catch-up contributions.