What Is the Maximum 401(k) Contribution for 2020 High Earners?

Dylan Telerski / 18 Jun 2020 / 401(k) Resources

Generally speaking, single-file individuals may contribute up to $19,500 to a 401(k) in 2020. Joint filers can contribute up to $19,500. An additional $6,500 is allowed in catchup contributions for 2020 for those 50 and over.

Employers may contribute up to $37,500 extra in matching contributions to a grand total of $57,000.

If you are considered a “highly compensated employee,” you may not have the same 401(k) contribution limits as your fellow employees. Nevertheless, there are ways to work around IRS restrictions and maximize your retirement savings.

How much can high earners contribute to a 401(k) in 2020?

By American standards, a “high earner” household brings in $100,000 to $350,000. If you fall into the low end of this category but earn less than $130,000, each adult filing separately in your household can contribute $19,500 into a 401(k), plus receive employer matching contributions.

If you are self-employed or an entrepreneur, you may contribute as both employee and employer to a maximum of $57,000. If you are over age 50, you can set aside an additional $6,500 in catch-up contributions.

Are you a highly compensated employee?

Different rules apply if the IRS defines you as a “highly compensated employee.” An HCE is someone who meets one or more of the following criteria:

• Received $130,000 or more in compensation from a 401(k)-sponsoring employer – “Compensation” covers paycheck income, overtime, bonuses, commissions, and salary deferrals made toward 401(k)s.
• Owns more than 5% of the interest in the business sponsoring his or her 401(k) plan – The ownership of company shares includes that of you, your spouse, children, and grandchildren working for the firm. So, if your holdings are 3%, and your child owns 3%, you are both considered “highly compensated employees.”
• Has been designated by the employer as a top earner for non-discrimination testing purposes – Employers may also choose to designate you as a “highly compensated employee” if you rank among the top 20% of employees paid.

For your employer to pass non-discrimination tests, average contributions made by HCEs can’t be more than 2% higher than the average contributions made by non-highly compensated employees. If the average contribution made by non-HCEs equals 4% of their salaries, the average contribution HCEs make can’t exceed 6% of their salaries.

The total amount of HCE contributions cannot exceed 2% of the total amount of non-HCE contributions. So how much high earners are able to contribute depends on how much the average worker contributes or whether the average worker is participating at all.

What if you’ve maxed out your contributions?

Companies conduct non-discrimination testing by March 15. Highly compensated employees who have maxed out their contributions can expect a refund of the excess contributions. This refund counts as taxable income and will increase tax liability for the current year.

Other options for high earners to maximize retirement savings

That $6,000 in catch-up contributions for those over-50 has no earning limit, so HCEs can at least maximize there. HCEs can also contribute up to $3,550 into an individual health savings account or up to $7,100 for a family, plus $1,000 a year if you’re over 55.

Highly compensated employees are ineligible for a tax-deductible Traditional IRA — which phases out once modified adjusted gross income reaches $65,000 single-file or $104,000 joint-file in 2020; however, they can save $6,000 (under 50) or $7,000 (50+) in after-tax contributions to enjoy tax-free earnings and growth.

A non-deductible IRA may also be converted into a Roth IRA – a strategy known as the backdoor Roth IRA – which allows HCEs to avoid paying tax on the conversion.

Many companies offer a deferred compensation plan, which allows a percentage of salary and taxes to be deferred to retirement. Many HCEs also put money into a low-cost deferred variable annuity, which functions like a non-deductible IRA without the contribution limits.

Spouses of HCEs can also max out their 401(k) contributions if they are not designated HCEs.

Contact Ubiquity to learn more about maxing out 401(k) contributions.