Do 401(k) Limits Include the Employer Match?

401(k) plans serve as a primary retirement savings vehicle, offering tax advantages to help grow savings. Employees contribute a portion of their salary, often supplemented by employer contributions, into an investment account. The Internal Revenue Service (IRS) establishes specific annual limits on contributions to these accounts.

Understanding Employee Contributions

Employee contributions to a 401(k) plan, known as elective deferrals, represent the portion of salary an individual chooses to contribute. These contributions can be made pre-tax or as Roth contributions. The IRS sets an annual limit on these elective deferrals, which applies to the total amount an individual contributes across all 401(k) plans if they participate in more than one. For 2025, the maximum amount an employee can contribute as elective deferrals is $23,500.

Individuals aged 50 and over are eligible to make additional “catch-up contributions” to their 401(k) plans. For 2025, the standard catch-up contribution limit for those aged 50 and older is an additional $7,500, bringing their total employee contribution limit to $31,000. An enhanced catch-up contribution applies for individuals aged 60, 61, 62, or 63, allowing them to contribute an additional $11,250 in 2025, if their plan allows. These employee contribution limits apply solely to the individual’s direct deferrals and do not include any contributions made by an employer.

How Employer Contributions Affect Overall Limits

While employee elective deferrals are subject to their own specific limits, a separate and higher overall limit applies to the total amount of contributions made to a participant’s 401(k) account in a single year. This overarching limit encompasses all sources of contributions: the employee’s elective deferrals, employer matching contributions, employer profit-sharing contributions, and any forfeited amounts from other participants that are reallocated to an account. This comprehensive limit is established under Internal Revenue Code Section 415(c).

Employer matching contributions are included in this overall Section 415(c) limit. For 2025, the total combined contributions from all sources—employee and employer—cannot exceed $70,000 or 100% of the employee’s compensation, whichever amount is less. If an employee is eligible for catch-up contributions, the overall limit can be higher, reaching $77,500 for those aged 50 and over, and potentially $81,250 for those aged 60-63, depending on the specific catch-up provision utilized.

It is important to distinguish between these two types of limits. Employer matching contributions do not count towards the employee’s individual elective deferral limit. However, they count towards the broader Section 415(c) limit, which governs the maximum total amount that can be added to a participant’s account from all sources within a year. The IRS adjusts these limits annually for inflation, so staying informed about current figures is always a good practice.

Addressing Contribution Overages

Exceeding the overall 401(k) contribution limit can lead to adverse tax consequences for the participant. If contributions surpass this annual limit, the excess amount is generally included in the participant’s taxable income for the year it was contributed. Furthermore, if these excess contributions are not corrected in a timely manner, they can be taxed a second time when they are eventually distributed from the plan.

To avoid these double taxation issues and potential penalties, it is important to address any overages promptly. The typical procedure involves the plan administrator distributing the excess amount back to the employee, along with any earnings attributable to those excess contributions. This corrective distribution should generally occur by April 15th of the year following the year the excess deferral was made. Missing this deadline can result in the excess amounts remaining in the plan, subject to taxation upon contribution and again upon eventual withdrawal.

Employees who find they have over-contributed, especially those who changed jobs during the year or contributed to multiple plans, should contact their plan administrator immediately. The administrator can guide the process of correcting the overage. While plan systems often have safeguards to prevent over-contributions within a single plan, coordinating contributions across multiple employers remains the individual’s responsibility.