401K Contribution Limits & Rules for 2015

Every year in October, the IRS announces cost of living adjustments that affect contribution limitations for pension plans and other related retirement programs for the upcoming tax year. A few changes have taken effect for 2015 401K contributions limits and rules, due to an increase in the cost of living index, which met the statutory thresholds that trigger adjustments.

A break down of the 2015 adjustments for employee elective deferrals and learning about the maximum contribution limits that affect employees who participate in 401(K) pension plans is important. Additional information for contribution rules that apply to highly compensated employees (HCEs) is also an aspect to keep in mind.

401(K) Employee Elective Deferrals Contribution Limits for 2015

The elective deferral limit is the maximum contribution an employee can make towards a 401(K) retirement savings plan. Because of the slight increase in consumer price index last year, this contribution has gone up by $500 in 2015. In effect, the contribution limit increased from $17,500 in 2014 to $18,000 this year for employees with traditional and safe harbor 401(K) plans. In addition, contribution limits for SIMPLE 401(K) plans have gone up from $12,000 to $12,500.

Catch Up Contribution Limits for 401(Ks) in 2015

As the name implies, the catch up contribution allows employees who have fallen behind on their 401(k) pension savings to make up for lost time. Individuals allowed to make this contribution must be aged 50 and above. The catch up contribution limit will now be capped at $6000 for safe harbor and traditional 401(Ks), which is $500 more than it was in 2014. Catch up contribution limits for employees participating in Simple 401(K) plans have increased from $2500 in 2014 to $3000 this year.

401(K) Employer Contribution Limits for 2015

Apart from elective employee deferrals and catch up contributions, employers can contribute to their workers’ 401(k) plans through match programs. It is always a good idea to participate in these plans if your employer offers one, since match programs offer free money for retirement savings, depending on the extent to which you take part in the plan.

Employers typically contribute a percentage match for your contribution until you have contributed a certain percentage of your gross pay on your own. For example, they can match 100% of your contributions, up to 6% of your salary.

As of 2015, any highly compensated employee that contributes elective deferrals and employer contributions to a 401(K) plan cannot exceed more than 125% of the average deferral percentage (ADP). If you have an income of $120,000 or more in 2015, it is important to contact your employer to find out if you are subject to any contribution limits.

Do Employer Contributions Affect Your Employee Elective Deferral Limit?

Many people get confused when it comes to how employer contributions affect their own elective deferral limits for a 401(k) account. For example, in this year’s case, some people may wonder whether their limit of $18,000 will reduce when they factor in the employer’s total contribution to the plan. To put it very simply and dispel any doubts you may have, you should know that the employer’s contribution does not affect your elective deferral limit.

This means that if you earn $100,000 from pre-tax dollars and your employer matches 100% for the first 6%, you could end up with $18,000 elective deferral savings and $6000 as employer contributions for a total of $24,000 in your 401(k) account. In addition, if you make a catch up contribution, your total annual 401(k) savings could total up to $30,000 in 2015.

Maximum 401(k) Contribution Limit for 2015

The overall limit on contributions is known as the maximum 401(k) limit, which is the maximum annual contribution you can make to your 401(k) account. It is calculated as the sum of total employer contributions, employee elective deferrals, catch up contributions and any after-tax savings. In 2014, the limit was $52,000 or 100% of an employee’s income. This year, maximum 401(K) contributions have been adjusted to an increment of $1000, totaling to $53,000 or 100% of your compensation.

It’s important to keep in mind the fact that employee elective deferrals and catch up contributions will continue to be indexed in subsequent years for inflation. In 2015, however, you can save more funds for retirement with your 401(K) plan than you could have last year, since most contribution limits have actually gone up. If you haven’t started putting money away for the future, this is a very good time to start!