Maximum Allowable Profit-Sharing Match on 401k
A 401k plan is a popular way to save for retirement. 401k plans offer significant tax advantages for employees. In addition, many employers also contribute to an employee's 401k plan with either a matching contribution or a profit-sharing contribution. 401k plans are regulated by the IRS, which limits how and when contributions can be made to a 401k account.
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401k Plan Fundamentals
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A 401k plan is a powerful tool to use to save money for retirement. Contributions to a 401k plan are made with pretax dollars. Furthermore, all money within a 401k plan grows tax-deferred, which means that no taxes are due on capital gains or interest earned within the account. Employee contributions to a 401k plan must be made via salary deferral.
Employer Contributions
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An employer may contribute to an employee's 401k plan. Employer contributions must be nondiscriminatory to non-highly compensated employees. Typically, employer contributions take the form of either a matching contribution, in which the employer matches some or all of an employee's contribution, or a profit-sharing contribution, in which all employees receive the same percentage contribution regardless of how much the employee contributes.
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Employee Contribution Limits
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The maximum annual contribution an employee can make to a 401k plan is $16,500, as of 2011. There is an exception for employees over age 50. These employees are permitted to make a catch-up contribution of up to $5,550 each year for a total 401k contribution of $22,000 annually. Furthermore, an employee may not contribute more than 100 percent of her salary.
Overall Contribution Limits
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Employer contributions to an employee 401k plan are limited in two ways. First, contributions are limited by the overall allowed contribution limit. The total of both employer and employee contributions is limited to the smaller of 100 percent of the employee's compensation or $49,000, as of 2011. Second, employers may only consider the first $245,000 of compensation when calculating contribution amounts. Thus, an employer making a 3 percent profit-sharing contribution may only contribute a maximum of $7,350 to any employee making over $245,000.
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