Contributions Limits to Qualified Plan

No less than three separate sections of the Internal Revenue Code (Code) limit contributions made to 401(k) plans. And, of course, each of these sections is different. Section 402(g) limits 401(k) salary deferral contributions (the 2012 limit is $17,000 ). Section 415 limits an individual’s contributions from all sources within a 401(k) plan to the lesser of $50,000 or 100% of compensation. Section 404 limits the overall tax-deductible contribution for the company to 25% of total compensation of eligible participants. In addition to these statutory limits, companies that sponsor plans often impose their own contribution limits. Please read on for further information on each of these limitations and their interactions.

Section 402(g) – Limitation on 401(k) Salary Deferral Contributions

The Code distinguishes 401(k) salary deferral contributions (deferrals) from other company retirement plan contributions. Deferral contributions are made to the plan at the direction of the employee. The employee could have chosen to receive these amounts in his/her paycheck, but instead elected to have their employer deposit them on a pre-tax basis to the plan. Section 402(g) of the Code limits these deferrals. The limitation for 2012 will be $17,000 and thereafter the limit will be adjusted for inflation. This limit is an individual taxpayer limit. Total deferral contributions allowed for the employee, for all plans across all employers, for the tax year, cannot exceed this 402(g) limitation.

The 402(g) limit does not apply to married couples combined, but individually. One spouse contributing up to the 402(g) limit does not affect the other spouse. Each may contribute to their respective plan independently of the other.

While not part of the 402(g) limit itself, the maximum deferral contribution for highly compensated employees may be further limited by the “Average Deferral Percentage” (ADP) test. See our “401(k) Plan ADP/ACP Testing” section for more information.

Section 415 – Limitation on all Contributions in a 401(k) Plan

For plan years beginning in 2012, this limit is increased to the lesser of $50,000 or 100% of compensation.

Section 404 – Limitation of Employer tax deductible contribution

Effective for plan years beginning in 2002, the Code limits the tax deductible contribution for the employer to 25% of total compensation of all eligible plan participants. Prior to 2002 this limit was 15%.

Additional Contributions

Section 414(v) – Catch-Up contribution for individuals age 50 and over

Under a provision added by EGTRRA in 2001, an individual age 50 or over may make additional elective deferrals in excess of the 402(g) dollar limit which is $17,000 in 2012. The contributions are exempt from ADP discrimination testing as well as Section 415 and 404 contribution limits. Catch-Up contributions will be allowed in the amount if $5,500 in 2012. In order to be eligible for a catch up contribution, the employee must reach a limit as imposed by either the IRS or the plan itself.

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