How Much Can a Highly Compensated Employee Contribute to a 401(k)?

A 401(k) plan is a significant tool for building retirement security. These employer-sponsored plans offer a tax-advantaged way to save, often supplemented by employer contributions. Understanding the rules governing these plans is important for all participants, especially for “Highly Compensated Employees” (HCEs), as their contribution capabilities are subject to additional regulations. This article clarifies the guidelines and limitations that apply to HCEs when contributing to their 401(k) accounts.

Defining a Highly Compensated Employee

The Internal Revenue Service (IRS) establishes specific criteria to identify a Highly Compensated Employee (HCE) for 401(k) plan purposes. This classification directly impacts how much an individual can contribute to their retirement savings and helps ensure that plan benefits do not disproportionately favor higher-earning individuals.

An employee is an HCE if they meet one of two primary criteria. The first involves compensation: an employee is an HCE if their compensation for the preceding year exceeded a specific IRS-determined amount. For 2025, an employee is considered an HCE if they received more than $160,000 in compensation in 2024. This includes salary, overtime, bonuses, commissions, and salary deferrals to cafeteria plans and 401(k)s. Employers may also apply a “top-paid group election,” meaning an employee is an HCE if they exceeded the compensation threshold and were in the top 20% of employees ranked by compensation for the preceding year.

The second criterion for HCE status is ownership: an employee is an HCE if they owned more than 5% of the employer’s business at any time during the current or preceding year, regardless of their compensation. This includes direct and indirect interests, such as shares held by a spouse, children, or parents, due to family attribution rules.

Individual 401(k) Contribution Limits

Individuals participating in a 401(k) plan are subject to specific IRS-set limits on their personal contributions, known as elective deferrals. These limits are adjusted periodically. The amount an employee can personally contribute to their 401(k) from their salary, whether pre-tax or Roth, is capped.

For 2025, the annual elective deferral limit for most 401(k) plans is $23,500. This is the maximum an individual can choose to have withheld from their paycheck and directed into their 401(k) account. This limit applies to the sum of all elective deferrals made by an employee across all 401(k) plans they participate in.

Individuals aged 50 and over can make additional “catch-up contributions” beyond the standard elective deferral limit. For 2025, the standard catch-up contribution for those age 50 and older is $7,500. This means an individual age 50 or older can contribute a combined total of $31,000 to their 401(k) plan in 2025. An enhanced catch-up contribution applies for individuals aged 60, 61, 62, and 63. For these specific ages in 2025, the catch-up contribution can be as high as $11,250, if the plan allows, potentially reaching $34,750 in total elective deferrals for the year. These individual contribution limits are foundational, but HCEs may face further adjustments due to non-discrimination testing.

Impact of Non-Discrimination Testing

Even when Highly Compensated Employees (HCEs) contribute within individual limits, their actual contributions might be impacted by IRS non-discrimination testing. These tests are mandated for 401(k) plans to ensure the plan does not disproportionately favor HCEs over Non-Highly Compensated Employees (NHCEs) in terms of contributions and benefits. This promotes equitable access to retirement savings for all employees.

Two primary tests are the Actual Deferral Percentage (ADP) test and the Actual Contribution Percentage (ACP) test. The ADP test compares the average salary deferral rates of HCEs to those of NHCEs. The ACP test does the same for employer matching contributions and after-tax employee contributions. If a plan fails these tests, it indicates that HCEs, on average, are contributing at a significantly higher rate than NHCEs, which can lead to adverse consequences for HCEs.

The most common consequence of a failed non-discrimination test for HCEs is the refund of excess contributions. If the plan fails, HCEs may be required to receive a distribution of their excess deferrals, along with any earnings. These refunded amounts are taxable income to the HCE in the year they were contributed. Similarly, if the ACP test fails, excess matching contributions or after-tax contributions may also be refunded to HCEs.

Employers often implement strategies to help their plans pass these tests, which can indirectly affect HCEs. For example, some employers adopt “Safe Harbor” 401(k) plans, which are exempt from annual ADP and ACP testing if certain contribution requirements are met. Other strategies include making qualified non-elective contributions (QNECs) or qualified matching contributions (QMACs) to NHCEs to increase their average participation rates.

Overall 401(k) Contribution Limits

Beyond individual elective deferral limits, there is an overarching maximum amount that can be contributed to an individual’s 401(k) account from all sources in a given year. This comprehensive limit, outlined in Internal Revenue Code Section 415(c), applies to the total “annual additions” to a participant’s defined contribution plan. This limit ensures that combined contributions from both the employee and employer do not exceed a certain threshold.

For 2025, the overall annual addition limit to a defined contribution plan, such as a 401(k), is $70,000. This limit encompasses all contributions made to the account, including the employee’s elective deferrals and any catch-up contributions.

In addition to employee contributions, the overall limit also accounts for all employer contributions made on behalf of the employee. This includes employer matching contributions, profit-sharing contributions, and any allocations of forfeited amounts from other participants’ accounts. The sum of all these contributions to an individual’s 401(k) cannot exceed the $70,000 threshold for 2025, or 100% of the participant’s compensation, whichever is less. If an individual participates in multiple employer-sponsored defined contribution plans, such as a 401(k) from one employer and a 403(b) from another, the combined contributions across all these plans are aggregated and count towards this same overall limit. The maximum compensation that can be considered for contributions and deductions in a qualified plan is also capped; for 2025, this compensation limit is $350,000.