There are lesser-known 401(k) limits for well-paid employees
Fact checked by Vikki Velasquez
Reviewed by Khadija Khartit
The Internal Revenue Service (IRS) sets limits for employer-sponsored 401(k) plans, such as the maximum annual employee contribution limit and the maximum employer contribution limit. Some of these limits apply to 401(k) contributions of employees who earn high salaries.
Here, we’ll explain more about the 401(k) limits for highly compensated employees (HCEs), including how they work.
Key Takeaways
- The Internal Revenue Service (IRS) has several income limits that apply to 401(k) plans.
- Some limits apply to highly compensated employees (HCEs), who are defined as employees who earn more than $160,000 for 2025 (up from $155,000 for 2024) and, in some cases, are in the top 20% of earners at the firm—or they own more than 5% of the business.
- The IRS limits the amount of income on which an employer can offer a matching contribution. That limit is $350,000 in 2025, up from $345,000 in 2024.
What Are Highly Compensated Employees?
Highly compensated employees (HCEs) are employees who earn more than the IRS maximum allowable compensation for a 401(k) of $160,000 for 2025 (up from $155,000 for 2024), or who own more than 5% of a business. Employers can also designate the top 20% of earners in the company as HCEs, as long as these employees meet the same income requirements.
For most employees, the most relevant limit that applies to a 401(k) is what the IRS calls the salary deferral limit. This is the amount of money that you can put into your 401(k) every year, and on which you don’t pay tax until you withdraw it in retirement. In 2025, this limit is $23,500 if you are under age 50, and $31,000 if you are 50 or older, including the catch-up contribution of $7,500. In 2024, those numbers were $23,000 and $30,500, respectively.
Other limits that the IRS places on 401(k) plans apply only to HCEs. Not all 401(k) plans have HCE participants. But for those that do, HCEs affect the way that a plan works in several ways.
First, the IRS requires that all 401(k) plans take a nondiscrimination test every year. By examining the contributions made by HCEs, the test determines whether all employees are treated fairly through the company’s 401(k) plan. These nondiscrimination stipulations are in place so that employee retirement plans do not discriminate in favor of HCEs.
Important
The IRS imposes a limit on the amount of income on which your employer can offer a contribution match. This limit is $350,000 in 2025.
Income and Contribution Limits for 401(k) Plans
There are two main types of income limits for 401(k) plans that mainly apply to HCEs: matching contribution limits and absolute limits. Let’s look at how both limits can affect HCEs.
Matching Contribution Limits
HCEs can face a 401(k) limit on the amount of income on which their employer can offer a contribution match. That limit is $350,000 in 2025. It’s a $5,000 increase to the previous year.
An example of how this contribution limit applies: say your salary is $500,000 and your employer offers a 100% match of your contributions, up to 5% of total compensation. The contribution limit is $23,500 regardless of income level, and you elect to contribute the maximum. You might expect your employer would be obligated to match your $23,500 contribution, since that figure is under 5% of your total income. But this is where the matching contribution limit applies. Because the IRS limits the amount of income that your employer can match, you can only receive matching contributions on 5% of $350,000. This means that your employer would contribute $17,500, not $23,000.
Absolute Limits
The second type of income limit that’s relevant here is an absolute limit on the amount that can be added to your 401(k) per year from all sources. In 2025, this limit is either 100% of your salary or $70,000 if you are under age 50. This is a $1,000 increase from the previous year. If you’re 50 or older, you have an absolute limit of $79,000 or 100% of your salary. In 2024, the limit was $76,500.
In practice, this limit only applies to two types of employees:
- HCEs whose employer has a generous 401(k) plan
- Self-employed individuals who are both the employer and employee for a solo 401(k) plan
What Happens if a 401(k) Fails Testing?
When a 401(k) plan fails nondiscrimination testing, it signals that HCEs may be contributing disproportionately compared to their NHCE peers. For HCEs, the most immediate impact of a failed test is the possibility of receiving a refund of excess contributions.
While it might sound like a windfall, it’s often a setback—especially if the refund is issued after the tax year has closed. These returned contributions are not only taxable in the year they’re distributed, but they also lose out on the opportunity for tax-deferred growth within the retirement account. Worse, if the correction isn’t made on time, the plan could face penalties or even disqualification from the IRS.
Employers face compliance issues when a plan fails testing. They are required to take corrective actions promptly—either by issuing HCE refunds or making additional contributions to NHCEs to even out the ratios. Repeated failures can also cause dissatisfaction among HCEs who are frustrated by the limits on their retirement contributions, potentially undermining the benefit’s appeal.
Strategies to Maximize Retirement Savings
HCEs can use a Mega Backdoor Roth IRA, which allows HCEs to contribute significantly more to a Roth IRA than the traditional annual limit permits. This strategy involves making after-tax contributions to a 401(k), then converting those funds into a Roth account. When implemented correctly, it enables potentially tax-free growth on large contributions, far beyond what a typical Roth IRA would allow.
Another approach involves after-tax contributions within a 401(k). Not to be confused with Roth contributions, these after-tax contributions can often be rolled over into a Roth IRA. For those with access, deferred compensation plans are also worth exploring. These allow HCEs to set aside a portion of their income to be taxed in retirement, when they may be in a lower tax bracket, offering potential long-term tax savings.
Finally, HCEs should not overlook Health Savings Accounts (HSAs) as a retirement planning tool. HSAs offer triple tax benefits: contributions are tax-deductible, growth is tax-free, and withdrawals are tax-free when used for qualified medical expenses. Because healthcare is a major retirement expense, funding an HSA to the maximum each year can prove just as valuable as a 401(k) in the long run.
What Does HCE Mean?
Highly compensated employees (HCEs) are employees who are earning more than $160,000 in 2025, or who own more than 5% of a business. Employers can also name the top 20% of earners in the firm as HCEs, as long as they’re also making over $160,000 for 2025. (In 2024, HCEs had to earn at least $155,000 per year.)
Are There Income Limits on 401(k) Plans?
The salary deferral limit—how much an employee can contribute to a 401(k) per year—is unaffected by income. However, the IRS limits the amount of income on which an employer can offer a matching contribution. For 2025, it’s $350,000; in 2024, it was $345,000. There is also an absolute limit, which is the total of all contributions to a 401(k) plan. For 2025, it’s $70,000 if you are under 50 years old; in 2024, it was $69,000.) If you’re 50 years old or older, it’s $79,000; in 2024, it was $76,500. And it can’t exceed the amount of your salary.
Are There Age Limits on 401(k) Plans?
Your 401(k) contributions can be affected by age. If you are 50 or older, you can make an extra contribution—a catch-up contribution—to your 401(k) account for a total of $7,500 per year. This raises the absolute contribution limit to $79,000.
The Bottom Line
Several income limits apply to 401(k) plans, including limits that mainly apply to highly compensated employees, also known as HCEs. HCEs are employees who earned more than $160,000 in 2025, or who own more than 5% of a business.
The IRS limits the amount of income on which an employer can offer a matching contribution to $350,000 in 2025. There is also an absolute limit of $79,000 on the total of all contributions to a 401(k) plan if you’re over 50. If you’re under 50, it’s $70,000. These limits only apply to a small percentage of employees.
