Does My Employer’s 401(k) Match Count Toward My Maximum Contribution?

The short and simple answer is no, but ...

If you participate in a 401(k) plan through your employer, congratulations. You've made a very important step toward securing your financial future. But keep in mind that you must adhere to the maximum contribution limits set by the Internal Revenue Service (IRS). Some employers also contribute to their employees' plans. If yours does, you may be left wondering whether those contributions affect how much you can sock away yourself.

The short and simple answer is no. Matching contributions made by employers do not count toward your maximum contribution limit. But the IRS does place a limit on the total contribution to a 401(k) from both the employer and the employee. Keep reading to find out more about contribution limits and what they mean to you.

Key Takeaways

  • Traditional 401(k)s allow employees of large corporations to invest and save pretax dollars for retirement.
  • Some employers match employee contributions up to a certain limit.
  • The IRS caps the amount of money you can save in a 401(k) each year, which is adjusted each year for inflation.
  • There are limits to combined employer-employee contributions to traditional 401(k) plans.
  • Non-corporate employees can also save for retirement through 403(b)s, 457 plans, and Thrift Savings Plans.

2022 Contribution Limits

The IRS adjusts contribution limits to certain retirement plans each year based on inflation. The following are contribution limits for different 401(k) plans.

Traditional 401(k) Plans

Traditional 401(k) plans are set up by large corporations. These plans allow employees to put pre-tax money into a special retirement account portfolio that is composed of mutual funds of their choosing. By using deductions from their gross income, individuals reduce their taxable income and, therefore, their overall tax liability.

Taxpayers who participate in traditional employer-sponsored 401(k) plans can contribute a maximum of $20,500 per year in 2022. That's an increase of $1,000 from the 2021 tax year. If you're over the age of 50, you can contribute an additional $6,500 for a total of $27,000.

The limit for combined contributions made by employers and employees cannot exceed $61,000 per year in 2022. For people over 50, this amount increases to $67,500, which includes the catch-up contribution.

In order to start investing in a 401(k), make sure you understand how this plan works and how it's structured as the rules for each employer's offerings may differ. Figure out how much you're able to contribute from every paycheck and your risk tolerance. You can determine this based on your age, investment goals, time to retirement, and investment strategy. Go through the investment options and choose the ones that make the most sense for you. Be sure to keep an eye on your portfolio and make adjustments if and when needed.

SIMPLE 401(k) Plans

A SIMPLE 401(k) plan is a simplified version of the traditional 401(k). These plans are established by small businesses with 100 or fewer employees and self-employed individuals. Those who operate sole proprietorships and partnerships can use these plans.

Employee contributions are lower than those for traditional plans. SIMPLE 401(k) plan contributions are maxed out at $14,000 for the 2022 tax year. Those who are 50 or over can contribute an additional $3,000 for a maximum of $17,000 for 2022.

One difference from the traditional 401(k) is that employers must make contribute either a matching contribution of a maximum of 3% of a worker's salary or a nonelective contribution worth 2% of each participating employee's wages.

Solo 401(k) Plans

The Solo 401(k) is also referred to as a one-participant 401(k) plan or a Uni-k plan. This plan is designed for small business owners who have no other employees. The exception may be their spouse, as long as they work for the business.

The limit for contributions to this kind of plan is $20,500 for 2022. Taxpayers who are 50 and older can make an additional catch-up contribution of $6,500 during the year for a total of $27,000.

An additional maximum of 25% of compensation can be contributed as an employer. So combined employer-employee contribution limits are maxed out at $61,000 in 2022 or 25% of your adjusted gross income (AGI)—whichever is lower.

The IRS imposes limitations on the 401(k) contributions of highly compensated employees (HCEs). These individuals can only use the first $305,000 of income when computing the maximum possible contributions in 2022.

Understanding 401(k) Plan Contribution Limits

The 401(k) plan and its variations are all long-term savings plans that are designed to help people build their retirement savings. The IRS considers them to be qualified plans, which means they have certain tax benefits for the employee, the employer, or both.

The tax advantage for employees, in most cases, is that their contributions are deducted from gross income, not net income. That reduces take-home pay. Less take-home pay means lower taxes, softening the blow, and the money goes into an investment account week after week, building long-term net worth.

Some employers choose to match a percentage of their employees’ contributions. But this isn't mandatory, which means some offer this perk while others don't. The average employer match was about 4.7% of the employee’s gross salary among employers who offer a match, according to Fidelity Investments. This is effectively a 4.7% salary bonus, and any financial advisor will tell you that it’s nuts not to take full advantage of it.

Contributions to 401(k)s and other retirement plans are limited by the IRS to prevent highly paid workers from benefiting more than the average worker from the tax advantages they provide.

Other Retirement Plans

Contributions limits for 2022 are the same for several other qualified retirement plans that are not as well known as the 401(k). We've highlighted some of these plans below.

403(b) Plans

The 403(b) plan works the same way as a traditional 401(k). Rather than catering to corporate employees, this retirement plan is geared toward employees in the education and health care sectors, such as teachers, school administrators, librarians, doctors, and nurses. Individuals who work in tax-exempt organizations also benefit, including clergy members, church employees, and those who work for 501(c)(3)s.

This plan is often structured as an annuity or a pension plan that makes distributions in regular installments when the account holder retires. This is a key difference from the 401(k), which is a lump-sum account that the employee can draw from after retirement.

457 Plans

The 457 plan is offered by governments at the state and local levels, as well as some nonprofit organizations. Public service employees can take part in the plan, such as police officers and firefighters. Unlike the traditional 401(k), this plan does not have a 10% early withdrawal penalty for early withdrawals.

Another key feature of the 457 plan is that it allows individuals to make double catch-up amounts. This provision helps people who are closer to retirement save more by making up for the years they didn't participate in the plan as long as they were eligible. This means that an individual who is three years away from retirement may put $41,000 into their 457 plan in 2022.

Thrift Savings Plans (TSPs)

Thrift Savings Plans (TSPs) are exclusively for employees of the federal government and military personnel. Participants can invest in six different funds through the program. And unlike the traditional 401(k), TSPs offer sliding employer matches. This means that the employer contributes 1% of your salary to a TSP even if you don't contribute. This maxes out at 5% with a 5% employee contribution. These often come with lower investment and administration fees as well.

What Is the Maximum 401(k) Contribution for 2022?

The maximum amount that an individual can contribute to a traditional 401(k) in 2022 is $20,500. Taxpayers who are 50 and over can make a catch-up contribution of $6,500 for a total of $27,000. Combined employer-employee matches cannot exceed $61,000 and $67,500 for individuals 50 and over.

What Does a “Highly Compensated Employee” Mean in Terms of a 401(k)?

A highly compensated employee can only use the first $305,000 of their annual income to calculate their maximum 401(k) contribution limit.

What Happens If I Exceed My 401(k) Limit?

You must notify the administrator of your 401(k) plan that you went over the contribution limit. Excess contributions and any related earnings must be withdrawn from your account by the April 15 deadline. The IRS charges a 6% penalty on any additional amounts contributed to your 401(k) every year you don't correct the error.

Article Sources
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