Do Employer Contributions Affect the 401(k) Contribution Limit?

A 401(k) plan is a tax-advantaged retirement saving account offered by employers that’s designed to help employees save for the future. These plans are funded through pretax earnings—taken before the money ever hits the employee’s paycheck—as well as employer contributions, if offered.

An employer may offer traditional 401(k) contributions as a benefit and, in some cases, they may offer the added benefit of a contribution match. This means that for every dollar the employee puts in their retirement savings account, the company will match some or all of it, usually up to an established maximum. 

However, employees are limited in how much they can contribute to their 401(k) plans each year, per IRS guidelines. Which begs the question: If an employer adds money to their employees’ retirement accounts in any given year, does that count towards the employee’s annual contribution limit?

Understanding a 401(k) plan

Businesses may choose to offer 401(k) savings plans as a retirement benefit for their employees. These plans, sponsored by the company, allow eligible employees to save and invest for their future retirement with pretax dollars. 

For 2022, employees may contribute up to $20,500 into their 401(k) plan. If they are 50 or older, a catch-up contribution allows an additional $6,500 to be added, for a total 401(k) savings limit of $27,000.

The contributed dollars are invested in funds chosen by the employer, where they will be managed until the employee reaches retirement age, transfers the funds, or is otherwise eligible to make a withdrawal. Withdrawals are typically subject to income tax in the year they’re taken out and can incur a 10% penalty if taken before age 59 1/2. 

Employer contributions 

In addition to the employee’s contributions, the company can also choose to add money to their employees’ retirement accounts. This is generally done as a contribution match and is often regarded as “free money” that employees don’t want to leave on the table.

With this benefit, employers offer to match whatever money the employee contributes to their 401(k) plan, up to an annual limit. An employer match may be dollar-for-dollar or based on a percentage, such as $0.50 for every $1 invested by the employee. 

Let’s say an employer offers a dollar-for-dollar match up to 3% of the employee’s salary. In this case, an employee earning $50,000 per year could contribute $1,500 to their 401(k) this year and see a full employer match to the tune of another $1,500. A total of $3,000 would be added to the employee’s 401(k) that year.

However, if the employee chose to contribute $8,000 to their 401(k) that same year, their employer match would still be capped at 3% of their earnings, or $1,500. This means they would contribute a total of $9,500 to their 401(k) this year.

Do employer contributions affect the 401(k) contribution limit?

If both an employee and an employer contribute to a 401(k) plan, this boosts (or could effectively double) the employee’s saving efforts. But does that free money from an employer count toward one’s annual contribution limit? 

In short, the answer is no. An employer’s 401(k) plan contributions don’t count toward the employee’s contribution limit. So, even if an employee younger than 50 puts $20,500 into their 401(k) one year, their employer can still contribute funds.

Still, there is a total contribution limit to note. 

All plan contributions—meaning the total of elective deferrals (excluding catch-up contributions), employer match funds, employer non-elective contributions, and allocations of forfeitures—cannot surpass the IRS’s overall limit on contributions. For tax year 2022, this limit is the lesser of:

• $61,000 or $67,500 for those over 50
• 100% of an individual’s annual compensation
  

This limit is designed for employees who have more than one retirement savings account that is managed by the same employer, or a related employer.

High-earning employees may face another hurdle when it comes to salary deferrals: contribution cut-offs. While most plans will allow high-earners to continue making contributions until they reach their annual contribution limit, some will cut off contributions early if their income hits a certain threshold. 

Once their income reaches the annual compensation limit ($305,000 in 2022), elective deferrals may stop if the plan requires it—even if they haven’t yet hit their contribution maximum for the year. That can impact both the employee’s annual contribution to the plan, as well as the total employer matching contributions.

How to maximize 401(k) retirement savings 

Employees who utilize a workplace-sponsored retirement plan, such as a 401(k), are already on a path toward long-term saving for retirement. If an employer offers a contribution match on top of those elective deferrals, however, failing to take full advantage of this match can mean leaving money on the table.

Employees can consider adjusting their monthly 401(k) plan deferrals to maximize their annual contributions, which may ensure they receive the full match offered by their workplace. 

The bottom line

Saving for retirement takes commitment and saving a lot over the years. Every dollar—like those offered through an employer match—is a dollar the employee doesn’t have to earn and can boost savings exponentially. 

Although there are IRS contribution limits, which cap how much one can save in a 401(k) retirement plan each year, these limits don’t include employer contributions. Company contributions do count toward the total overall limit for the year, however, which is set at 100% of the employee’s compensation or $61,000 in 2022.