What Are the Income Limits for 401(k)s: Highly Compensated Employees

Lesser known 401(k) limits for well-paid employees

A number of limits can apply to employer-sponsored 401(k) plans such as maximum annual employee and employer contribution limits. Some of these limits apply to 401(k) contributions of employees who earn high salaries or to employers that are generous with their matching contributions.

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 401(k) limits apply to highly compensated employees (HCEs) who earn more than the maximum limit ($135,000 in 2022) or own 5% or more of a business. 
  • Employers can voluntarily designate the top 20% of earners in the firm as HCEs.  
  • The IRS limits the amount of income on which an employer can offer a matching contribution. That limit is $305,000 in 2022. 

What Are Highly Compensated Employees?

Highly compensated employees (HCEs) are employees who earn more than the Internal Revenue Service (IRS) maximum ($135,000 in 2022), or who own more than 5% of a business. Employers can also voluntarily designate the top 20% of earners in the firm as HCEs.

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 2022, this limit is $20,500 if you are under age 50, and $27,000 if you are 50 or older.

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 equally 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 $305,000 in 2022.

Income and Contribution Limits for 401(k) Plans

There are two main types of income limit 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. This limit is $305,000 in 2022.

Here’s an example of when this limit would apply. Suppose your annual salary is $500,000, and your employer’s policy is to match 100% of your contributions, up to 5% of your total compensation. You then contribute the IRS limit of $20,500 (since this limit is not affected by your income). At this point, you would expect your employer to match your contribution of $20,500, since this is less than 5% of your 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 $305,000. This means that your employer would contribute $15,250, not $20,500.

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 2022, this limit is either 100% of your salary, $61,000 if you are under age 50, or $67,500 if you are 50 or older, whichever is less.

In practice, this limit only applies to two types of employees:

  • HCEs whose employer has a very generous 401(k) plan
  • Self-employed individuals who are both the employer and employee for a solo 401(k) plan

Therefore, it’s possible that a generous employer could contribute $60,000 to an employee’s 401(k) in a given year as a nonmatching contribution. In this case, the employee themselves could contribute only an extra $1,000 to their plan.

What are highly compensated employees (HCEs)?

Highly compensated employees (HCEs) are employees who earned more than $135,000 in 2022, or who owned more than 5% of a business. Employers can also voluntarily designate the top 20% of earners in the firm as HCEs.

Are there income limits on 401(k) plans?

The regular limit, or how much an employee can contribute to a 401(k) per year and what the Internal Revenue Service (IRS) calls the salary deferral limit, is unaffected by income. However, the IRS limits the amount of income on which an employer can offer a matching contribution. That limit is $305,000 in 2022. There is also an absolute limit, which is the total of all contributions to a 401(k) plan. In 2022, it can’t exceed $61,000.

Are 401(k) income limits affected by age?

Your 401(k) contributions can be affected by age. If you are 50 or older, you can make extra contributions to your 401(k) account of $6,500 per year. This also raises the absolute contribution limit to $67,500.

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 $135,000 in 2022, 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 $305,000 in 2022. There is also an absolute limit of $61,000 on the total of all contributions to a 401(k) plan. These limits only apply to a small percentage of employees.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Internal Revenue Service. “Definitions.”

  2. Internal Revenue Service. “IRS Announces 401(k) Limit Increases to $20,500.”

  3. Internal Revenue Service. “401(k) Plan Fix-It Guide — The Plan Failed the 401(k) ADP and ACP Nondiscrimination Tests.”

  4. Office of the Law Revision Counsel, U.S. Code, U.S. House of Representatives. “26 USC 414: Definitions and Special Rules.”

  5. Internal Revenue Service. “401(k) Plans — Deferrals and Matching When Compensation Exceeds the Annual Limit.”

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