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Different variables affect limits on employees' 401(k) pretax contributions


How much in pretax contributions employees can make to their 401(k) plans is based on federal law and the design of the plan.

Under federal law, the maximum pretax contribution employees generally can make to their 401(k) plan in 2014 is $17,500.

In addition, the total contribution by the employee and employer is capped at $52,000 this year.

Depending on certain variables, however, employees may be able to contribute more or less than $17,500.

Under a Tax Code provision Congress made permanent in 2006, employees age 50 and older can make each year additional so-called catch-up contributions. The maximum catch-up contribution is $5,500 this year.

However, highly compensated employees — those earning at least $115,000 this year — may be limited to less than the $17,500 maximum if their employer's 401(k) plan does not pass statutory nondiscrimination tests. Under those tests, the average contributions of highly compensated employees cannot exceed the rate of rank-and-file employees by statutorily set amounts.

Still, an employer can avoid the nondiscrimination testing if it adopts what is known as safe harbor 401(k) plan design.

To qualify, for example, for one widely utilized safe harbor, an employer must match 100% of employees' deferrals up to the first 3% of pay and 50% of deferrals on the next 2% of pay. This option is the more popular, benefit consultants say.

To qualify for another safe harbor, an employer must automatically contribute to employees' 401(k) accounts an amount equal to 3% of pay.