If your employer offers a 401(k) plan, it can be one of the easiest and most effective ways to save for your retirement. But while a major advantage of 401(k) plans is that they let you put a portion of your pay automatically into your account, there are some limits on how much you can contribute.
Each year, usually in October or November, the Internal Revenue Service (IRS) reviews and sometimes adjusts the maximum contribution limits for 401(k) plans, individual retirement accounts (IRAs), and other retirement savings vehicles. The IRS updated the contribution limits for 401(k) plans in 2020 on Nov. 6, 2019, increasing the employee contribution from $19,000 to $19,500.
Other important increases that went into effect for 2020:
- The catch-up contribution rose to $6,500.
- The limit on combined employer/employee contributions rose to $57,000. (Add in a catch-up contribution and the limit went to $63,500.)
- Employees can contribute up to $19,500 to their 401(k) plan for 2020, up $500 from 2019.
- Anyone age 50 or over is eligible for an additional catch-up contribution of $6,000 in 2019 and $6,500 in 2020.
- Employers can contribute too, but there was a $56,000 limit on combined employer and employee contributions for 2019 ($62,000, if eligible for a catch-up contribution).
- In 2020, the combined limit went up to $57,000—$63,500 with the catch-up contribution.
- Employees are already 100% vested in their individual contributions. There may be a vesting schedule for their match.
First let's take a look at how things changed in 2020 from 2019.
Basic Limits Rose in 2020
The basic employee contribution limit for 2020 is $19,500, up from $19,000 in 2019 and $18,500 in 2018. The $19,500 limit includes all elective employee salary deferrals, as well as any after-tax contributions made to a designated Roth account within your 401(k) or a special Roth 401(k) plan. The same contribution limits apply to 403(b) plans and most 457 plans, as well as to the federal government’s Thrift Savings Plan.
If you have multiple 401(k) accounts, your total contributions to all of them—both traditional and Roth—cannot exceed that $19,500 limit. Any contributions you make to other types of retirement accounts, such as IRAs, do not affect your 401(k) contribution limit.
To encourage workers nearing retirement to speed up their saving, the IRS allows 401(k) participants ages 50 and over to make additional contributions beyond the standard contribution limit. If you are 50 or older, you can kick in an extra $6,500 catch-up contribution in 2020 (up from $6,000 in 2019 and 2018) for a total of $26,000.
Another big benefit of participating in a 401(k) plan is that your employer may contribute to it as well. Many employers match employee contributions by adding, for example, 50 cents or $1 for every dollar the employee contributes. Employers can also make elective contributions regardless of how much or little the employee contributes, up to certain limits. The general limit on total employer and employee contributions for 2020 is $57,000, or 100% of employee compensation (subject to a max of $285,000), whichever is lower. For workers 50 and up, the base limit is $63,500 ($57,000 plus the $6,500 catch-up contribution).
Depending on your age and compensation level, you may be subject to different limits than your coworkers.
Limits for Highly Paid Employees
If you earn a very high salary, you may be considered a highly compensated employee (HCE), subject to more stringent contribution limits. To prevent wealthier employees from benefiting unfairly from the tax benefits of 401(k) plans, the IRS uses the actual deferral percentage (ADP) test to ensure that employees of all compensation levels participate proportionately in their companies' plans. If non-highly compensated employees (NHCEs) do not participate in the company plan, the amount that HCEs can contribute may be restricted.
Contributions in Excess of 2020 Limits
Evaluating your estimated contributions for the year ahead and analyzing your contributions at the end of a calendar year can be very important. If you find that you have contributions in excess of the 2020 limits, the IRS requires notification by March 1, 2021 and excess deferrals should be returned to you by April 15, 2021.
Comparing 2020 and 2019 Limits
The chart below from the Society for Human Resource Management provides a breakdown of how the rules and limits for defined-contribution plans (401(k), 403(b), and most 457 plans) are changing for 2020 vs. 2019.
|Defined Contribution Plan Limits||2019||2020||Change|
|Maximum employee elective deferral||$19,000||$19,500||+$500|
|Employee catch-up contribution (if age 50 or older by year-end)*||$6,000||$6,500||+$500|
|Defined contribution maximum limit, all sources||$56,000||$57,000||+$1,000|
|Defined contribution maximum limit (if age 50 or older by year end); maximum contribution all sources, plus catch-up||$62,000||$63,500||+$1,500|
|Employee compensation limit for calculating contributions||$280,000||$285,000||+$5,000|
|Key employee's compensation threshold for nondiscrimination testing||$180,000||$180,000||none|
|Highly compensated employees' threshold for nondiscrimination testing||$125,000||$125,000||none|
*The catch-up contribution limit for participants age 50 or older applies from the start of the year to those turning 50 at any time during the year. (If you were born on New Year's Eve, you can still take it.)
Internal Revenue Service. "401(k) contribution limit increases to $19,500 for 2020; catch-up limit rises to $6,500." Accessed March 18, 2020.
Society for Human Resources Management. "401(k) Contribution Limit Rises to $19,500 in 2020." Accessed March 18, 2020.