**Do employer 401k contributions count against my limit?**
When calculating your 401k contribution limit, you need to consider both your employee contributions and any employer matching contributions. Both types of contributions count towards the annual limit, which is set by the IRS each year.
For 2023, the annual limit for 401k plans is $22050, up from $20500 in 2022. This limit includes both employee and employer contributions. So, if you contribute $1000 to your 401k, and your employer contributes $500, you’ve used up $1500 of your annual limit.
There is a catch, however. If your employer offers a **safe harbor** 401k plan, then your employer’s matching contributions don’t count against your limit. This means you can contribute more money to your 401k, and your employer’s contributions will still go in.
**Safe harbor** plans are designed to make it easier for employees to save for retirement. They have certain requirements, such as a minimum contribution percentage and a vesting schedule. If your employer’s plan meets these requirements, then your employer’s matching contributions won’t count against your limit.
**Here’s an example to illustrate:**
You contribute $1000 to your 401k, and your employer contributes $500. If your employer’s plan is a safe harbor plan, then your employer’s matching contribution won’t count against your limit. So, you’ll have used up $1000 of your annual limit, and you’ll be able to contribute another $11050 to your 401k.
If your employer’s plan is not a safe harbor plan, then your employer’s matching contribution will count against your limit. So, you’ll have used up $1500 of your annual limit, and you’ll be able to contribute another $1050 to your 401k.
**The bottom line:** Whether or not employer 401k contributions count towards your limit depends on whether or not your employer’s plan is a safe harbor plan. If it is, then your employer’s matching contributions won’t count against your limit. If it isn’t, then your employer’s matching contributions will count against your limit.
Post-Tax vs. Pre-Tax Employer Contributions
Employer contributions to 401(k) plans can be either pre-tax or post-tax. Pre-tax contributions are deducted from your paycheck before taxes are taken out, so they reduce your taxable income. Post-tax contributions are made with after-tax dollars, so they do not reduce your taxable income.
Both pre-tax and post-tax employer contributions count towards the annual 401(k) contribution limit. However, pre-tax contributions are also subject to the annual limit on employee elective deferrals. For 2023, the employee elective deferral limit is $22,500 ($30,000 for participants age 50 or older).
The table below summarizes the key differences between pre-tax and post-tax employer contributions.
| Feature | Pre-Tax Contributions | Post-Tax Contributions |
|---|---|---|
| Tax Treatment | Reduce taxable income | Made with after-tax dollars |
| Contribution Limit | Subject to the annual limit on employee elective deferrals | Not subject to the annual limit on employee elective deferrals |
| Impact on 401(k) Limit | Count towards the annual 401(k) contribution limit | Count towards the annual 401(k) contribution limit |
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Employer Matching vs. Employee Elective Deferrals
When it comes to 401(k) plans, there are two main types of contributions: employer matching and employee elective deferrals.
- Employer matching: This is money that your employer contributes to your 401(k) plan on your behalf. It is usually a percentage of your salary, up to a certain limit.
- Employee elective deferrals: This is money that you choose to have taken out of your paycheck and contributed to your 401(k) plan. You can choose how much you want to contribute, up to a certain limit.
Both employer matching and employee elective deferrals count towards the annual 401(k) contribution limit. For 2023, the limit is $22,500 ($30,000 for those age 50 or older).
However, there are some important differences between employer matching and employee elective deferrals.
| Employer Matching | Employee Elective Deferrals | |
|---|---|---|
| Who contributes the money | Your employer | You |
| Is it vested? | Usually not | Yes |
| How much can you contribute? | Up to a certain limit | Up to a certain limit |
| How does it count towards the limit? | Counts towards the limit | Counts towards the limit |
| Taxes | May be taxed when you withdraw it | Not taxed until you withdraw it |
Contribution Types
401(k) contributions come in two main types: safe harbor and non-safe harbor. Safe harbor contributions are made by the employer and are not subject to the annual contribution limit. Non-safe harbor contributions are made by the employee and are subject to the annual contribution limit.
Safe Harbor Contributions
- Made by the employer
- Not subject to the annual contribution limit
- Can be used to meet the employer’s matching contribution obligation
- Can be used to make top-heavy contributions
Non-Safe Harbor Contributions
- Made by the employee
- Subject to the annual contribution limit
- Cannot be used to meet the employer’s matching contribution obligation
- Cannot be used to make top-heavy contributions
| Contribution Type | Made by | Subject to Limit | Can Meet Matching Obligation | Can Make Top-Heavy Contributions |
|---|---|---|---|---|
| Safe Harbor | Employer | No | Yes | Yes |
| Non-Safe Harbor | Employee | Yes | No | No |
Well, there you have it! Hopefully, this discussion has shed some light on the question of whether employer 401(k) contributions count towards the limit. If you found this article helpful, feel free to share it with your friends and spread the financial literacy! In the meantime, keep an eye out for our future articles where we’ll continue to tackle common financial conundrums. Thanks for reading, and we’ll see you next time!