How Do Employer and Employee 401k Limits Work?

Different limits and regulations apply to the funds set aside by employees and their employers in a 401(k). These separate but related caps are established by the Internal Revenue Service (IRS) and govern how much can be saved annually in these tax-advantaged retirement accounts. Understanding the distinction between what an individual can personally contribute and what their company can add on their behalf is important to maximizing retirement savings, as the structure involves several layers of limitations.

Employee Elective Deferral Limits

An individual’s contribution to their 401(k) from their paycheck is called an elective deferral. For 2025, the maximum elective deferral limit is $23,500. This is a personal limit that applies to the individual, not to each job or plan they might have.

The $23,500 ceiling applies to the combined total of contributions to both traditional pre-tax and Roth 401(k)s. If an employee contributes to both account types, the sum cannot exceed this annual limit. For instance, a $15,000 contribution to a traditional 401(k) leaves $8,500 that can be contributed to a Roth 401(k) in the same year.

If an individual holds two jobs with separate 401(k) plans, their total elective deferrals across all plans are still subject to the single $23,500 limit. It is the employee’s responsibility to monitor their contributions to avoid tax penalties from over-contributing. Employer contributions do not count toward this employee limit.

Employer Contribution Rules

Employer contributions to an employee’s 401(k) are separate from the employee’s elective deferral limit. These contributions fall into two main categories: matching contributions and non-elective contributions. Both types are governed by the plan’s specific documents.

Matching contributions are where the employer contributes a certain amount based on how much the employee defers. A common matching formula is 50 cents for every dollar the employee contributes, up to the first 6% of their salary. The specific formula is determined by the employer and must be outlined in the plan’s documents.

Some employers make non-elective contributions, such as profit-sharing payments. These are not tied to an employee’s own contributions, as the company contributes to the 401(k)s of eligible employees regardless of their participation. These contributions are subject to the plan’s terms and are calculated as a percentage of compensation.

The Overall Contribution Limit

Beyond the employee-specific deferral limit, the IRS imposes a broader cap on total “annual additions” to a 401(k) account. For 2025, this overall limit is $70,000 or 100% of the employee’s compensation, whichever is less.

This limit is the sum of employee elective deferrals, all employer contributions, and any after-tax contributions. For example, if an employee under age 50 contributes their maximum of $23,500 and their employer adds $10,000 in matching funds, the total annual addition is $33,500. This is well below the $70,000 overall limit.

If a 401(k) plan permits them, an employee who has maxed out their elective deferrals can contribute additional funds on an after-tax basis, up to the overall $70,000 limit. These are distinct from Roth deferrals and are made from pay that has already been taxed. This option allows for additional savings if an employer’s contributions are modest.

Age 50 and Over Catch-Up Contributions

The tax code allows for catch-up contributions for individuals age 50 or older to help them bolster their savings. For 2025, the standard catch-up amount is $7,500, which allows eligible participants to defer an additional amount above the standard $23,500 limit. An individual is eligible if they will attain age 50 by the end of the calendar year.

This means an employee aged 50 or over can contribute a total of $31,000 in elective deferrals in 2025 ($23,500 standard limit + $7,500 catch-up). The SECURE 2.0 Act introduced a higher catch-up limit for those aged 60, 61, 62, and 63. For 2025, this enhanced catch-up amount is $11,250, allowing these individuals to contribute a total of $34,750.

Catch-up contributions increase the employee’s personal deferral limit and are also added on top of the overall $70,000 annual additions limit. For an employee making the standard $7,500 catch-up, their overall limit for total contributions becomes $77,500. For an employee aged 60-63 making the enhanced $11,250 catch-up, their overall limit becomes $81,250.

Special Considerations for the Self-Employed

Self-employed individuals, including freelancers and small business owners, can use a Solo 401(k) to contribute in two capacities: as the “employee” and as the “employer.” This dual role allows for greater savings, though all contributions are governed by the same annual limits and require careful calculation for compliance.

As the “employee,” the individual can make elective deferrals up to the standard limit of $23,500 in 2025, plus any applicable age-based catch-up contributions. This portion of the contribution is based on their self-employment income.

As the “employer,” the individual can make a non-elective contribution. This amount is calculated as a percentage of their net adjusted self-employment income. For a sole proprietor, this is up to 20% of net earnings from self-employment, which is gross income minus one-half of self-employment taxes. The combination of employee and employer contributions cannot exceed the overall annual limit of $70,000 for 2025.