An employer sponsored 401k plan allows an employee to defer a portion of his salary into the plan pre-tax. These features allow the employee to reduce the current amount of income taxes paid and save for retirement. The employer may also make contributions into an employee's plan in the form of matching contributions or profit sharing. The employee and employer have different contribution limits.
An employee participating in a 401k plan elects to defer a portion of her wages or salary into the plan. The employer deducts the deferral amounts from each paycheck and send them to the plan administrator for investment. The Internal Revenue Service (IRS) sets a limit each year how much an employee can defer for the year. At the time of publication, the annual maximum employee 401k contribution was $16,500 or $22,000 if the employee was age 50 or over.
Many employers make matching contributions to the money deposited by employees in their 401k accounts. The amount of employer matching money does not affect how much an employee may contribute. For example, if an employer matches at a 50 percent level without limit, an under age 50 employee could defer the full $16,500 and the employee would contribute $8,250 for the employee.
Profit Sharing Contributions
Employers are also allowed to make lump sum contributions into employee 401k accounts. These deposits are referred to as profit sharing contributions. A profit sharing contribution is limited to 25 percent of an employees annual salary or wages. A contribution of this type would be in addition to any salary deferrals made by the employee, but would include any employer paid matching funds.
Maximum Per Year Contributions
The IRS also has a cap on the total amount of money which can be deposited into an employee's 401k account during a single year. At the time of publication, the maximum contribution amount was $49,000. If more than this amount was deposited by the employer and employee together, the excess money must be withdrawn from the employee's account. The excess money may be either employer or employee contribution money.
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