Understanding contribution limits for 403(b) and 401(k) retirement plans

Do I need to monitor what is contributed into participants’ retirement plans?

Perhaps the single most important retirement account available to employees today is their employer-sponsored 401(k) or 403(b) plan. These defined contribution retirement plans have, in many cases, replaced the traditional defined benefit pension plans of years gone by. These 401(k) and 403(b) retirement plans allow for a significant amount of money to be set aside annually as Participants plan for their Future-Funded Ministry. These retirement plan savings are subject to significant tax advantages as well.

As the taxation of monies contributed to a retirement plan is often deferred to a later point in time, the IRS limits the amount of money that can be deposited into a 401(k) or 403(b) plan on an annual basis. The IRS refers to these retirement plan limits simply as the “Contribution Limits”. The Contribution Limits apply to both employee and employer contributions. The Contribution Limits change from one year to the next as they are directly tied into the Federal Cost of Living Adjustment (COLA).

It is the Plan Sponsor / Plan Administrator’s responsibility to monitor the amount of employee and employer money that is contributed into a Participant’s retirement plan account on an annual basis. Most payroll systems allow for this to be easily monitored. If excess contributions are made into the plan and not corrected in a timely manner, the plan becomes subject to disqualification in the event of an IRS audit of the plan.

Outlined below are the basic 403(b) and 401(k) retirement plan Contribution Limits for 2020. These limits must be adhered to. Remember that your retirement plan continues to be one of the very best ways to prepare for the future financially.

  • Elective Deferral Limits—§402(g) Limits—Employee Voluntary Contributions—$20,500
  • Age 50 Catch-Up Provision—§414(v) Limits—in addition to the Elective Deferral Limits above—$6,500
  • 15 Years of Service Catch-Up Provision—§402(g)(7) Limits—in addition to the Elective Deferral Limits above, (403(b) plans only, see dialog below*)—$3,000
  • Maximum Combined Employee and Employer—§415 Limits—$61,000 (or 100% of Includible Compensation—apply the lesser of the two)
  • Maximum Combined Employee and Employer (with Age 50 Catch-Up Contributions)—§415 Limits —$67,500 (or 100% of Includible Compensation—apply the lesser of the two)
  • IRC 415(c)(7) Catch-Up Option (seldom used but nonetheless available, 403(b) plans only, see dialog below **) $10,000 per year Employer Contribution for very low-income employees

For a more detailed discussion on Contribution Limits, click here.

*Currently limits are based on the 2022 limits.