The Maximum Limit on Wages for 401(k) Purposes
A 401(k) plan is a way for employees to save some of their earnings toward retirement. Most employers who sponsor 401(k) plans allow employees to contribute to the plan through automatic payroll deductions. Some may choose to match their employees contributions up to a certain percentage. The maximum amount of yearly contributions depends upon the employee's age and the current limits established by the Internal Revenue Service (IRS).
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Contribution Limits
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The IRS establishes a yearly limit for employee contributions to an employer-sponsored 401(k) plan. This limit applies to the total amount of contributions made to one or more plans. For example, if an individual has more than one job and contributes to each employer's 401(k) plan, he would need to divide the annual limit between the two plans. In 2011, the annual contribution limit equaled $16,500, according to the IRS. Cost-of-living increases take effect for contribution limits established after 2011.
Elective Contributions
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Those who continue to make contributions past the age of 50 may be able to exceed the annual limits. According to IRS regulations, elective or catch-up contributions can be made for individuals who are near retirement. These additional contributions allow them to make up for previous years when adequate money may not have been put aside. Since not all 401(k) allow elective contributions, it is important to check with the plan's administrator. In 2011, those who had reached the age of 50 were allowed to make additional contributions of $5,500.
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Employer Contributions
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Employers that match employee contributions have certain limits according to the amount of the employee's income. The limit is typically a percentage of the employee's annual earnings before taxes. For example, if the employer's limit is 10 percent and the employee's income is $100,000, the maximum employer contribution is $10,000. It is important to note that the amount of the employer's contributions is not subject to the employee's annual contribution limits. The amount of income that an employer can consider when making contributions is limited to $245,000 as of 2011. Employer matching falls under a total plan contribution limit.
Total Contribution Limits
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The IRS establishes total annual contribution limits to 401(k) plans. Total contributions include employee, employer matching, elective and deferred deposits into an individual's plan(s). This amount usually cannot exceed 100 percent of a person's income or a pre-established limit, whichever is less. In 2011, the total contribution limit was $49,000, according to the IRS. This government may adjust this limit for cost-of-living increases in 2012 and beyond. Total contribution limits apply to deposits made with pre and post-tax income.
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References
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