A 401(k) plan enables business owners and their employees to save for retirement. Get the details on the following frequently asked questions:
Under the 401(k) contribution rules, business owners and employees may deduct a portion of their pay and have it deposited into their 401(k) account as a pre-tax contribution. The amount contributed to the 401(k) will not be included in taxable income until the dollars are distributed from the plan – hopefully during their retirement years. If a 401(k) allows Roth contributions, some or all of these contributions may be made as after-tax Roth contributions. No matter which type of contribution is made, there is one maximum 401(k) limit per person–$22,500 for 2023 (or $30,000 if age 50 or older).
If an individual defers more than $22,500 for 2023 (or $30,000 if age 50 or older), the business owner must distribute the excess amount plus earnings to the individual. This is a taxable distribution (unless the salary deferrals were made as Roth contributions).
Almost all 401(k) plans accept catch-up contributions. These are salary deferral contributions made by owners and employees who are age 50 or older, who maybe need to catch up on their retirement savings. In 2023, an additional salary deferral of up to $7,500 can be made as a catch-up contribution on top of the maximum annual salary deferral.
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Nondiscrimination test limit
Business owners and highly compensated employees may not be permitted to contribute the full salary contribution amount each year
If lower-paid employees in the 401(k) plan are not making significant contributions. 401(k) plans must pass certain nondiscrimination tests each year to demonstrate that the plan is not discriminating against lower compensated employees.
These tests limit the:
If a 401(k) plan fails these tests, the business owner must either return a portion of the HCEs’ contributions or make additional contributions for the lower paid employees.
To prevent disproportionately large contributions for HCEs, the 401(k) plan rules place a limit on the amount of compensation that may be considered when calculating an employer matching contribution or other contribution that is based on a percentage of compensation.
For 2023, this limit is $330,000.
For example, assume you earn $350,000 in 2023. The 401(k) plan includes an employer matching contribution of up to 3% of your compensation. Under these compensation cap rules, your employer could make a matching contribution of up to $9,900 (3% x the compensation cap of $330,000)–not $10,500 (3% x your full compensation of $350,000).
Business owners and HCEs may be able to increase the amount they can contribute to a 401(k) plan through one or more of these strategies.
Catch-up contributions are made after an individual reaches the $22,500 (for 2023) annual salary contribution limit or a plan-imposed limit (e.g., a failed nondiscrimination test). Because catch-up contributions are not included in nondiscrimination testing, even if you cannot make the full $22,500 salary contribution because of limits imposed by a plan test, you will still be able to make a catch-up contribution, up to $7,500, if you are age 50 or older.
If lower paid employees increase their saving rates, HCEs and business owners will be able to make larger contributions. To encourage employees to save more in the 401(k), employers may want to engage financial advisors or other service providers to educate employees about the benefits of saving in a 401(k) and helping workers calculate how much they need to save to reach their financial goals in retirement.
If you adopt a Safe Harbor 401(k) plan, it will be deemed to pass these nondiscrimination tests, meaning the owner and other HCEs can contribute any amount up to the annual salary contribution limit, plus catch-up contributions if eligible, without worrying about the contribution rate of lower paid employees. Offering a Safe Harbor 401(k) plan may also help improve participation and savings rates for all employees.
It can be difficult to stay up to date with annual changes in 401(k) limits, along with all the other kinds of retirement vehicles you may be saving in. That’s where the experts at Ubiquity come in. Remember every plan is designed differently, so it’s important to refer to your Plan Document for any compensation or other applicable limits.
Age 49 and under
$22,500
Age 50 and older
Additional $7,500
Key Employee Officer Compensation
$215,000
Highly Compensated Employee
$150,000
Annual Compensation Limit
$330,000
Age 49 and under
Up to $6,500 (must have earned income)
Age 50 and older
Additional $1,000
Single
$83,000 – $83,000
Married – Filing joint returns
$116,000 – $136,000
Married – Filing separately
$0 – $10,000
Non-active participant spouse
$218,000 – $228,000
Single
$138,000 – $153,000
Married – Filing joint returns
$218,000 – $228,000
Married – Filing separately
$0 – $10,000
Age 49 and under
$15,500
Age 50 and older
$19,000
Individual (employer + employee)
$3,850
Family (employer + employee)
$7,750
Age 55 or older**
Additional $1,000
**Catch-up contributions can be made at any time during the year in which the HSA participant turns 55.
If you need more detailed guidance, see IRS Notice 2020-79.
If you’re a small business owner and need a 401(k) plan for yourself and your company, only Ubiquity offers flat-fee plans plus free expert advice. We’ll fully customize your 401(k) to meet the specific needs of your small business.
Setting up a 401(k) can be complicated. Only Ubiquity gives small business owners access to 401(k) experts in addition to industry-leading low flat-fees. Each sales expert has over a decade of experience designing small business 401(k) plan design. Take advantage of this free benefit.
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44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357
© 2023 Ubiquity Retirement + Savings
Privacy Policy
Do not sell my info
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357
