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For 2000, the maximum
pre-tax contribution a participant can make is $10,500 – subject to the 25% of pay
limitation and special non-discrimination tests described below. The limit for 1999 was
$10,000. The IRS imposes this limit because Uncle Sam loses tax revenue for every dollar
you contribute to your 401(k). The limit is periodically adjusted for inflation.
The percentage of pay limit stipulates that the maximum amount that can be accumulated in
any of your tax-qualified defined contribution plans – 401(k), thrift,
profit-sharing, ESOP, and money purchase – is limited to 25% of your gross pay or
$30,000, whichever is less. Every dollar contributed (both employee and employer) counts
toward this limit.
Finally, there are special non-discrimination rules to prevent highly compensated
employees (HCE) from being able to save substantially more than lower paid employees. If
you earned $80,000 or more in 1999, or owned 5% or more of the company, additional
contribution caps may apply for you in 2000, because the HCE designation is based on your
previous year's salary. For 2000, the income limit for highly compensated employees is
$85,000. What does this mean? If you earn $85,000 or more in 2000, your contributions to a
401(k) plan could be limited in 2001.
In addition to the pre-tax contributions described above, some plans also allow
participants to make after-tax contributions, which aren't included in the government
limit. |
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