401(k) Limit and Company Match

Does the 401(k) limit include company match?

Understanding the nuances of 401(k) contributions is crucial for maximizing retirement savings and ensuring compliance with IRS regulations. Many employees, while planning their retirement savings strategy, often wonder whether the employer's contributions or "company match" are included in the annual 401(k) contribution limit set by the IRS. Let's delve into this topic to provide clarity and enhance understanding.

Understanding 401(k) Contribution Limits

When discussing 401(k) contributions, it's important to distinguish between two main types: employee contributions and employer contributions (often referred to as company match). Every year, the IRS sets limits on how much employees can contribute to their 401(k) plans through salary deferrals.

Employee Contribution Limits

As of 2023, the IRS allows employees to contribute up to $22,500 to their 401(k) plans if they are under 50 years old. Employees aged 50 and over can contribute an additional $7,500, known as the "catch-up contribution," allowing them to contribute a total of $30,000. These contribution limits are subject to change based on inflation adjustments, so it's important to stay informed about annual updates.

Employer Contribution and Matching

Employers often offer matching contributions to incentivize employees to save for retirement. An employer match is typically structured as a percentage of the employee's contribution, up to a certain percent of their salary. For example, a common matching formula might be 50% of the employee's contributions, up to 6% of their salary.

Is the Company Match Included in the 401(k) Limit?

The short and straightforward answer is: No, the company match is not included in the 401(k) contribution limit for employee salary deferrals. The $22,500 limit (or $30,000 for those over 50) pertains solely to employee contributions. Employer contributions and any applicable matching do not count toward this limit.

Total Contribution Limits

However, there is another limit to consider: the overall contribution limit, which includes the total of employee contributions, employer contributions (including matching), and any other type of employer contributions. For 2023, the total contribution limit is $66,000, or $73,500 for those eligible for catch-up contributions. This is referred to as the "annual additions limit."

Working Example: Employee and Employer Contributions

To illustrate how this works, consider the following example:

• Employee: Jane is 35 years old and has a salary of $100,000.

• Employee Contribution: Jane contributes the maximum employee limit of $22,500 to her 401(k).

• Employer Match: Jane's employer offers a 50% match on her contributions up to 6% of her salary.

  • Jane contributes 6% of her salary, which is $6,000.
  • Her employer matches 50% of her contribution, contributing $3,000.

In this scenario, Jane has $22,500 in employee contributions and $3,000 in employer contributions, totaling $25,500. This total does not exceed the annual additions limit of $66,000 for 2023.

The Importance of Company Match

Employer matches are essentially "free money" that can significantly boost your retirement savings. Failing to maximize the match is essentially leaving money on the table. To make the most of an employer match, employees should at least contribute enough to their 401(k) to receive the full match.

Considerations to Maximize Benefits

• Verify Matching Policy: Understand your employer's matching policy to ensure you are contributing enough to receive the full benefit.

• Regular Review: Given the annual changes in IRS limits and employer policies, review your contributions regularly to optimize your savings.

• Contribution Strategy: Adjust your contribution levels when you receive pay raises or changes to ensure you maximize the matching benefit.

Common Misconceptions

Many employees have misconceptions regarding the interplay between employee contributions, employer matches, and contribution limits. Here are some clarified points to consider:

• Myth: The employer match counts toward my annual employee contribution limit.

  • Fact: As explained, the employer match does not count against the employee contribution limit but does count toward the total annual addition limit.

• Myth: If I reach my employee contribution limit, my employer will stop matching.

  • Fact: Typically, an employer will continue matching based on your eligible contributions up to their defined limits, even if you reach the IRS contribution limit.

• Myth: I cannot make catch-up contributions if I receive an employer match.

  • Fact: Catch-up contributions are independent of whether you receive an employer match; eligibility is based solely on age.

Conclusion: Strategic Retirement Planning

Understanding the specific boundaries of 401(k) contribution limits can empower employees to make informed decisions that maximize their retirement savings. While employee contributions are limited to $22,500 (or $30,000 for those over 50), this limit does not include any employer match, allowing for potentially significant additional savings.

Employees should aim to take full advantage of any available employer match, stay informed about any changes in contribution limits, and regularly assess their savings strategy. By doing so, they can ensure that they are optimizing their retirement savings potential.

For more personalized guidance, consider consulting with a financial advisor who can provide tailored advice based on your unique financial situation and goals. Meanwhile, you can visit our website for more detailed insights into 401(k) plans and other retirement savings options.