401(k) Contribution Limits
If you are saving for your 401(k) retirement plan, it’s important to know how much you can contribute to your plan each year. The maximum amount you can contribute to your 401(k) plan account may be adjusted from year to year.
Contribution Limits for 2023
For the upcoming year, for both traditional (pre-tax) and Roth contributions, the annual limit is $22,500 per participant. Plus, a catch-up contribution of $7,500 is allowed for participants 50 and over, bringing their total annual contribution limit to $30,000. Any amount that your employer contributes, as part of an employer match feature, for example, does not count towards these limits.
Combined contributions made by employers and employees have an annual limit of $66,00. As previously stated, any participants aged 50 and over are allowed a catch-up contribution of $7,500 bringing their total combined limit to $73,500.
What is a catch-up contribution?
A catch-up contribution is a type of retirement savings contribution that allows participants age 50 and over to make additional contributions to their 401(k) plan accounts, allowing these participants to set aside more for their retirement.
Usually participants who have gotten a late start in contributing to their retirement will take advantage of the catch-up contribution option.
How are catch-up contributions made?
Catch-up contributions can be made beyond the current limits. A participant who is age 50 or older can then make a catch-up contribution after the maximum regular contribution allowed for the year has been reached, which in 2023 is $22,500.
If you have decided to make catch-up contributions, reach out to your plan administrator for further details.
What are Employer contributions?
Some employers offer the benefit of contributing to an employee's 401(k) account. Depending on your plan’s features, these contributions can be made through:
- Employer matching contributions: When an employer matches your contributions, it adds a certain amount to your 401(k) plan account based on how much you contribute annually. There are two common types of matches:
- Partial matching: Typically your employer will match half of whatever you contribute, but no more than 3% of your salary total. To get to the maximum amount of match, you have to contribute 6% of your compensation.
- Dollar-for-dollar matching: This is referred to as a full match, your employer contributes the same amount you do up to a certain amount determined by your employer.
- Profit Sharing: This contribution type is a pre-tax contribution that employers make to their employees' 401(k) plan accounts after the end of the year. As an example, employers can use profit sharing as a year-end bonus for employees. There are two common options:
- Same dollar amount method: Every employee receives the same contribution amount.
- Comp-to-comp method: Profit sharing is based on employees’ relative salaries, an example is when employees are set to receive contributions equal to 5% of their respective salary.
- Safe Harbor: This is a special type of 401(k) plan that requires employers to make contributions to the plan for their employees’ benefit. There are a few available contribution options:
- Basic safe harbor: Also known as an elective safe harbor, this type of plan requires employers to match 100% of employees’ contributions up to 3% of an employee's compensation.
- Nonelective safe harbor: Employers make a retirement contribution of 3% of compensation for all workers, regardless of whether they choose to participate in the plan.
- Enhanced safe harbor: This type of plan typically provides a 100% match of up to 4% of an employee's compensation.
- Qualified Automatic Contribution Arrangement safe harbor: This type of plan features an automatic enrollment of employees after they satisfy the plan’s eligibility rules and contributes 3% of an employee's compensation to the plan unless the employee opts out. The contribution rate increases each year by 1% until the employee’s deferral rate reaches 6% of compensation.
To confirm whether your plan offers any employer match features, please review your "Plan Highlights" or your plan's Summary Plan Description. Both are located in the 'Documents' window of your Vestwell participant portal under the 'Plan' documents tab.