What Is the 415(c) Limit on Annual Additions?

Internal Revenue Code Section 415(c) establishes the total amount of contributions that can be added to a participant’s account in a defined contribution plan, like a 401(k), for the year. This regulation is designed to limit the tax-advantaged savings an individual can accrue annually. The limit applies to the combined total of employee and employer contributions within a single limitation year, which for most plans is the calendar year. This overall ceiling operates independently of other caps, such as the limit on an employee’s elective deferrals.

Components of Annual Additions

The calculation of “annual additions” under the 415(c) limit is comprehensive, including nearly every dollar that enters a participant’s account during the limitation year. The primary components are:

• Employee contributions, which encompasses both pre-tax and Roth elective deferrals that an employee chooses to make from their salary.
• Employer contributions, a category that includes any matching contributions, as well as non-elective or profit-sharing contributions.
• After-tax contributions, which are voluntary contributions made from an employee’s take-home pay and do not reduce taxable income.
• Allocated forfeitures, which are unvested employer contributions left by former employees that are redistributed to the accounts of remaining active participants.

What Is Not Included

Certain funds are excluded from the annual additions calculation. Catch-up contributions, which allow older workers to save more, do not count toward the 415(c) limit. For 2025, participants age 50 or over can contribute an additional $7,500, while a higher limit of $11,250 applies to participants ages 60 through 63. Rollover contributions from other qualified plans or IRAs are not counted because they are transfers of existing retirement assets. Repayments of plan loans are also excluded as they restore a participant’s previously borrowed funds.

Applying the Limit

The 415(c) limit is determined by a two-part test, and a participant’s maximum annual addition is the lesser of the two resulting figures. The first part is a specific dollar amount set by the IRS, which is subject to annual cost-of-living adjustments. For the 2025 plan year, this dollar limit is $70,000.

The second part of the test is a compensation-based limit. Under this rule, total annual additions cannot exceed 100% of the participant’s compensation for the limitation year. Compensation includes wages, salaries, and fees for professional services reported on a Form W-2, but it excludes most non-taxable income or expense reimbursements.

The practical application of this “lesser of” rule means that different limits can apply to different employees. For example, a high-income employee earning $200,000 would be subject to the $70,000 dollar limit. In contrast, an employee earning $50,000 for the year would be subject to the compensation limit; their total annual additions could not exceed $50,000, even though the dollar limit is higher.

Correcting Excess Annual Additions

When total contributions to a participant’s account exceed the 415(c) limit, the plan sponsor must take corrective action to avoid severe penalties, including plan disqualification. The IRS provides specific correction methods under its Employee Plans Compliance Resolution System (EPCRS). The primary method involves distributing the excess amount from the participant’s account, along with any earnings attributable to the excess.

The order in which funds are returned is also specified. Any after-tax employee contributions are returned first. If the excess is greater than the after-tax amounts, the next funds to be distributed are pre-tax or Roth elective deferrals made by the employee. The distributed amounts are then treated as taxable income to the participant in the year of the distribution.

An alternative correction method involves using a plan suspense account if the excess is due to employer contributions. Those funds can be moved into an unallocated suspense account and used in subsequent years to reduce future employer contributions. Timely correction through one of these approved methods is required for maintaining the plan’s qualified status.

Plan Aggregation Rules

The compliance requirements for the 415(c) limit become more complex when an individual participates in multiple retirement plans sponsored by the same employer. For the purpose of applying the annual additions limit, the IRS requires that all defined contribution plans maintained by a single employer be treated as one plan. This means contributions across all plans must be combined and measured against a single 415(c) limit.

This aggregation rule extends to a controlled group of employers. If a parent company owns a controlling interest in one or more subsidiary companies, all defined contribution plans across the entire group of related companies are aggregated for each employee. An employee’s total annual additions are the sum of all contributions made on their behalf to any 401(k) or other defined contribution plan within that group.

Consider an employee who participates in both a 401(k) plan and a separate profit-sharing plan offered by their company. If the employee receives contributions in both plans during the year, the sum of those contributions cannot exceed their single 415(c) limit. This rule prevents employers from circumventing the annual limit by simply establishing multiple retirement plans.