What Is the Maximum 401(k) Contribution for 2021 High Earners?
Dylan Telerski / 20 May 2021 / 401(k) Resources
If you’re a high earner in 2021, you’ll likely want to maximize the amount of money set aside for retirement. 401(k) plans are tremendous vehicles for producing wealth over time, though there are maximum limits established by the Internal Revenue Service to ensure the wealthiest Americans do not use their retirement plans to evade their tax obligations and to ensure employers are not setting up their plans simply to benefit the top corporate elite. The maximum 401(k) contribution changes from year to year. Get the latest numbers here!
2021 Maximum Contribution Limits for High Earners
There are general maximum 401(k) contribution limits that apply to both high and low earners:
- Annual Employee Contribution (Under 50): $19,500
- Annual Employee Contribution (50+): $26,000
- Employer/Employee Maximum (Under 50): The lesser of 25% of the plans’ total eligible salary OR $58,000
- Employer/Employee Maximum (50+): The lesser of 25% of the plans’ total eligible salary OR $64,500
- Maximum Compensation for Employee: $290,000
The $290,000 maximum = 25% of a $232,000 salary + the maximum employer contribution of $58,000.
High Earners Impact a 401(k) Plan’s Compliance With ERISA
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that protects individuals by ensuring equal opportunity access to company-sponsored retirement plans. To remain compliant and pass annual nondiscrimination tests, so-called “Highly Compensated Employees” generally cannot contribute more than 2% above their salaries than non-Highly Compensated Employees. So, if the non-HCE group contributes 5% of their combined salary to the company retirement plan, the HCEs cannot contribute more than 7% of their combined salary.
What’s Changed Since 2020?
While the $19,500 individual limit and $6,500 catchup contribution remain the same, changes include:
- The maximum employer/employee contribution rate increased by $1,000 from 2020 to 2021.
- The maximum income threshold of $290,000 increased by $5,000 from 2020 to 2021.
There have been no changes to the IRS definition of a “highly compensated” or “key” employee.
Are You a High Earner in 2021?
The IRS defines a Highly Compensated Employee as someone who meets at least one of the following:
- Owns more than 5% of the business sponsoring the plan at any point within the last year, or has a spouse, child, and grandparents working for the company who collectively own 5+% of the business.
- Made more than $130,000 in compensation during 2020 (Highly Compensated Employee). Compensation includes paycheck income, overtime, bonuses, commissions, and 401(k) salary deferrals.
- Ranks among the Top 20% of salaries paid out by the company.*
*This only applies if the Top Paid group is elected in the plan document, please see consult your specific plan’s details.
Example of How a Maximum 401(k) Contribution Limit Applies to a High Earner
Here’s how a 401(k) maximum limit might play out in the real world:
- Age: Under 50
- Your annual salary: $400,000
- Employer’s Plan: 5% match
- Individual Contribution: $19,500
- Employer Match: $14,500 (5% of $290,000 maximum)
So, rather than receiving 5% of your salary – which would be $20,000 – the match is limited to the upper threshold of $290,000 set by the IRS in 2021. This amount may increase next year, or the year after, based on cost of living adjustments.
Are There Additional Ways to Save for Retirement?
In addition to funding your 401(k) to the max, you can also contribute up to $3,600 into an individual Health Savings Account (HSA) or $7,200 for a family HSA, plus $1,000 extra if you’re over 55.
High earners may also invest as much as they’d like in stocks, bonds, mutual funds, exchange-traded funds, and real estate investment trusts – though they will have to pay taxes on the money invested, as well as capital gains taxes on the earnings.
Contact Ubiquity Retirement + Savings to find out which of our affordable, hassle-free small businesses 401(k)s are right for you and your employees. You can count on a low, transparent monthly fee that stays the same, regardless of your plan balance or participation numbers.