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Contribution Limits |
The IRS imposes several limits on the amount that can be contributed to your 401(k) plan account in a year.
Pre-tax contribution
The maximum pre-tax amount you can contribute each year to your 401(k) plan account is determined by the IRS. For 2002, your combined pre-tax contributions made to employer-sponsored plan(s) you participate in during the year cannot exceed $11,000. As a result of the Economic Growth and Tax Relief Reconciliation Act of 2001, the maximum pre-tax contribution limit will eventually increase to $15,000 as follows:
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Year |
Limit |
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2003 |
$12,000 |
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2004 |
$13,000 |
|
2005 |
$14,000 |
|
2006 |
$15,000 |
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After 2006, the maximum pre-tax contribution limit is indexed in $500 increments for inflation. |
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These amounts are your IRS pre-tax limit for the given year even if you work for more than one employer. Your plan may have its own limits as well.
Total contribution
The IRS has also set limits on the total amount that may be contributed to your 401(k) account from all sources combined, including any employer matching or profit-sharing contributions, and any employee after-tax contributions. For 2002, the maximum is the lesser of 100% of compensation or $40,000. The $40,000 limit will increase in $1,000 increments based on cost of living adjustments.
Catch-up contributions
If you are expected to reach age 50 or older during the calendar year January 1-December 31 and are making the maximum Plan or IRS pretax contribution, you may make an additional "catch-up" contribution each pay period. Starting in 2002, the maximum annual catch-up contribution is $1,000. Please note that you must make a separate election to take advantage of the catch-up contribution. This $1,000 catch-up contribution will increase to $2,000 in 2003, $3,000 in 2004, $4,000 in 2005, and $5,000 in 2006. After 2006, limits will be subject to cost of living adjustments (COLAs) in $500 increments. If, at the end of the calendar year, your regular pre-tax contributions have not exceeded the Plan contribution limit or the IRS annual dollar limit, some or all of your catch-up contributions will be recharacterized as regular pre-tax contributions.
Highly-compensated employees
There are rules to make sure that an employer does not discriminate and unfairly favor its highly compensated employees through a 401(k) plan. The term highly-compensated employees includes a person(s) who was a 5% owner at any time during the current or preceding year. The term also includes an employee who had the compensation of more than $85,000 in 2001 or more than $90,000 in 2002. (Note the compensation used to determine if an employee is highly compensated is the amount of compensation from the preceding year.) Generally, to make sure a 401(k) plan is compliant, each year the plan must pass a non-discrimination test. (Note that some plans are designed so that they do not need to pass these tests each year.)
These tests generally compare the amounts contributed by and on behalf of highly compensated employees to those contributed by and on behalf of the non-highly compensated employees. As long as the difference between the percentages of these two groups is within the Internal Revenue Code's guidelines, the plan retains its tax-qualified status. If the plan does not pass the tests, the plan must take corrective action or lose its tax-favored status.
