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For 2018, 401(k) Contribution Limit for Employees Rises to $18,500

    'Catch-up' contribution for those 50+ stays at $6,000, while contribution limit from all sources hits $55,000

    By Stephen Miller, CEBS

    Employee 401(k) contributions for 2018 will top off at $18,500—a $500 increase from 2017, following two years without a boost—while the "all sources" maximum contribution (employer and employee combined) rises to $55,000, up $1,000, the IRS announced on Oct. 19.

    Plan participants who contribute to the limit next year will be able to receive up to $36,500 from match and profit-sharing contributions ($55,000 minus $18,500).

    For participants ages 50 and over, the additional "catch-up" contribution limit will stay at $6,000.

    HR and payroll managers should plan to adjust their systems for the new year and to inform employees about the new limits in year-end open enrollment materials.

    The employee 401(k) contribution increase "is the first since plan year 2015, and reflects a consumer price index increase of 1.97 percent between the third quarters of 2016 and 2017, the largest increase in the past six years," said Brian Donohue, a partner in the Chicago office of October Three Consulting, a retirement plan advisory firm. "Inflation has been historically low during the entire current economic recovery," he noted.

    Due to a mild uptick in inflation, rounding rules required the 2018 contribution limits to be increased, while other plan limits that are tied to higher inflation targets remain unchanged. "Although inflation continues to be low, it was enough to finally push up the 401(k) and 403(b) contribution limit in 2018 by $500," said Harry Sit, CEBS, who edits The Financial Buff blog.

    Defined Contribution Plan Limits

    2018

    2017

    Change

    Maximum employee elective deferral

    $18,500

    $18,000

    +$500

    Employee catch-up contribution (if age 50 or older by year-end)

    $6,000

    $6,000

    No

    change

    Defined contribution maximum limit, all sources

    $55,000

    $54,000

    +$1,000

    Defined contribution maximum limit (if age 50 or older by year end); maximum contribution all sources plus catch-up

    $61,000

    $60,000

    +$1,000

    Employee compensation limit for calculating contributions

    $275,000

    $270,000

    +$5,000

    Compensation limit of "key employees" in a top-heavy plan

    $175,000

    $175,000

    No

    change

    Compensation limit of "highly compensated employees" in a top-heavy plan (HCE threshold)

    $120,000

    $120,000

    No

     change

     

    HR professionals should convey to employees their plan contribution limits for next year. Not all plan participants will be able to fund their 401(k) accounts up to the maximum, of course, but the contribution cap is a goal they should keep in mind and may encourage those who can defer extra dollars for retirement savings to do so.

    Conversely, high-earners may want to increase their contributions a bit to reach the full annual limit. They also may want to ensure that they don't hit the annual limit prior to year-end, which could mean losing out on employer matching contributions tied to paycheck deferrals, unless the plan sponsor has agreed to "make whole" with the full year's match those participants who max out prior to their final paycheck.