401(k) Match Limits: What Payroll Administrators Need to Know
401(k) Match Limits: What Payroll Administrators  Need to Know

401(k) Match Limits: What Payroll Administrators Need to Know

It’s a relatively small change, but it’s a change for payroll administrators to take notice of. As of November 2019, your employees’ contribution limits for their 401(k) increased to $19,500 from $19,000. The increase raises the total annual contribution amount (employee plus employer contribution) to $57,000 or 100% of the employee’s salary if they make less than that. Most companies typically offer 3-6% in matching funds, but there is no limit to the amount an employer can contribute as long as the annual cap isn’t reached.

2020 & 2019 401(k) Match Limits

Defined Contribution Plan Limits  2020  2019  Difference 
Maximum employee contribution  $19,500   $19,000  +$500 
Catch-up contribution for employees aged 50 or older  $6,500 $6,000  +$500 
Total contribution maximum (employer + employee)  $57,000 $56,000  +$1,000 
Total contribution maximum (employer + employee) for employees aged 50+  $63,500 $62,000  +$1,500 
Employee compensation limit  $285,000 $280,000  +$5,000 
Key employee salary threshold  $185,000 $180,000  +$5,000 
Highly compensated employee salary threshold  $130,000 $125,000  +$5,000 

401(k) Contribution Limits

A very important aspect of your 401(k) program for you and your company’s employees to keep in mind: The total annual contribution amount is an individual limit meaning that it applies to all 401(k) plans an employee has. It’s important to make sure they’re keeping a close eye on their annual total if they have multiple accounts.

No matter how much money an employee makes, only the first $285,000 is eligible for employer and employee contributions. This cap was put in place to help ensure retirement savings are equitable across the board for all employees.

What’s a 401(k) Catch-Up Contribution?

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) created the catch-up contribution provision so older employees could set aside enough savings for retirement. Your employees who are 50 and older qualify to contribute an extra $6500 a year to their account.

What Are Highly Compensated and Key Employees?

The IRS defines a highly compensated employee as:

  • Someone who owns more than 5% interest in the company regardless of how much compensation that person earned, or
  • Someone whose salary is $130,000 or greater

Key employees are either:

  • A company officer who makes more than $185,000
  • A 5% owner of the business, or
  • An employee who owns more than 1% of the business and makes more than $150,000

The Employee Retirement Income Security Act (ERISA) requires employers to undergo 401(k) discrimination testing every year to ensure plans are not favoring higher-income employees over those who earn less.

How to Help Ensure 401(k) Compliance

Many companies struggle with the administrative burden required for handling the recordkeeping and payroll data involved in 401(k) management. If that sounds like you, check out our 401(k) plan administration. Critical information like deferral changes, loans, matches and demographic data can be accessed and updated without the need for time-consuming manual processes.

401k Administration

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