The Internal Revenue Service (IRS) sets limits for employer-sponsored 401(k) plans, such as the maximum annual employee contribution limit and the maximum employer contribution limit. Some of these limits apply to 401(k) contributions of employees who earn high salaries.
Here, we’ll explain more about the 401(k) limits for highly compensated employees (HCEs), including how they work.
Key Takeaways
- The Internal Revenue Service (IRS) has several income limits that apply to 401(k) plans.
- Some limits apply to highly compensated employees (HCEs), who are defined as employees who earn more than $155,000 for 2024 (up from $150,000 for 2023) and, in some cases, are in the top 20% of earners at the firm—or they own more than 5% of the business.
- The IRS limits the amount of income on which an employer can offer a matching contribution. That limit is $345,000 in 2024, up from $330,000 in 2023.
What Are Highly Compensated Employees?
Highly compensated employees (HCEs) are employees who earn more than the IRS maximum allowable compensation for a 401(k) of $155,000 ($150,000 for 2023), or who own more than 5% of a business. Employers can also designate the top 20% of earners in the company as HCEs, as long as these employees meet the income requirements ($155,000 for 2024 and $150,000 for 2023).
For most employees, the most relevant limit that applies to a 401(k) is what the IRS calls the salary deferral limit. This is the amount of money that you can put into your 401(k) every year, and on which you don’t pay tax until you withdraw it in retirement. In 2024, this limit is $23,000 if you are under age 50, and $30,500 if you are 50 or older, including the catch-up contribution of $7,500. (For 2023, those numbers are $22,500 and $30,000, respectively).
Other limits that the IRS places on 401(k) plans apply only to HCEs. Not all 401(k) plans have HCE participants. But for those that do, HCEs affect the way that a plan works in several ways.
First, the IRS requires that all 401(k) plans take a nondiscrimination test every year. By examining the contributions made by HCEs, the test determines whether all employees are treated fairly through the company’s 401(k) plan. These nondiscrimination stipulations are in place so that employee retirement plans do not discriminate in favor of HCEs.
The IRS imposes a limit on the amount of income on which your employer can offer a contribution match. This limit is $345,000 in 2024.
Income and Contribution Limits for 401(k) Plans
There are two main types of income limits for 401(k) plans that mainly apply to HCEs: matching contribution limits and absolute limits. Let’s look at how both limits can affect HCEs.
Matching Contribution Limits
HCEs can face a 401(k) limit on the amount of income on which their employer can offer a contribution match. That limit is $345,000 in 2024. (In 2023, it's $330,000 in 2023.)
An example of how this contribution limit applies: say your salary is $500,000 and your employer offers a 100% match of your contributions, up to 5% of total compensation. The contribution limit is $23,000 regardless of income level, and you elect to contribute the maximum. You might expect your employer would be obligated to match your $23,000 contribution, since that figure is under 5% of your total income. But this is where the matching contribution limit applies. Because the IRS limits the amount of income that your employer can match, you can only receive matching contributions on 5% of $345,000. This means that your employer would contribute $17,250, not $23,000.
Absolute Limits
The second type of income limit that’s relevant here is an absolute limit on the amount that can be added to your 401(k) per year from all sources. In 2024, this limit is either 100% of your salary or $69,000 if you are under age 50. (In 2023, it's $66,000.) If you're 50 or older, you have an absolute limit of $76,500 or 100% of your salary. (In 2023, it's $73,500.)
In practice, this limit only applies to two types of employees:
- HCEs whose employer has a generous 401(k) plan
- Self-employed individuals who are both the employer and employee for a solo 401(k) plan
What Does HCE Mean?
Highly compensated employees (HCEs) are employees who are earning more than $155,000 in 2024, or who own more than 5% of a business. Employers can also name the top 20% of earners in the firm as HCEs, as long as they're making over $155,000 per year for 2024. (For 2023, HCEs must earn at least $150,000 per year.)
Are There Income Limits on 401(k) Plans?
The salary deferral limit—how much an employee can contribute to a 401(k) per year—is unaffected by income. However, the IRS limits the amount of income on which an employer can offer a matching contribution. For 2024, it's $345,000. (For 2023, it's $330,000.) There is also an absolute limit, which is the total of all contributions to a 401(k) plan. For 2024, it's $69,000 if you are under 50 years old. (For 2023, it's $66,000.) If you're 50 years old or older, it's $76,500. (For 2023, it's $73,500.) And it can't exceed the amount of your salary.
Are There Age Limits on 401(k) Plans?
Your 401(k) contributions can be affected by age. If you are 50 or older, you can make an extra contribution—a catch-up contribution—to your 401(k) account for a total of $7,500 per year. This raises the absolute contribution limit to $76,500.
The Bottom Line
Several income limits apply to 401(k) plans, including limits that mainly apply to highly compensated employees, also known as HCEs. HCEs are employees who earned more than $155,000 in 2024, or who own more than 5% of a business.
The IRS limits the amount of income on which an employer can offer a matching contribution to $345,000 in 2024. There is also an absolute limit of $76,500 on the total of all contributions to a 401(k) plan if you're over 50. If you're under 50, it's $69,000. These limits only apply to a small percentage of employees.
