Do Company Matched 401(K) Funds Count Against My Limit?

Excess 401(k) contributions result in tax penalties.

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If you're lucky enough to have a company that matches your contributions to a 401(k) plan, you're leaving free money on the table if you don't take full advantage of the matching contribution. Though the matching contribution counts toward your overall contribution limit, it usually won't decrease the amount you can defer into your 401(k) plan for the year.

Two Contribution Limits

When figuring your contribution limits for 401(k) plans, you have to make sure you don't exceed either of two contribution limits. The first limit applies only to contributions that you make, also called elective deferrals. The second limit includes both your deferrals and your employer's matching contributions. For example, your elective deferral limit might be $17,000, while your total contribution limit, including both your elective deferrals and your employer's matching contributions, is $50,000.

Classification of Matching Contributions

Matching contributions are not counted as elective deferrals for the year, but they do count against the total contribution limit for 401(k) plans. For example, say your limits are $17,000 for elective deferrals and $50,000 for total contributions. If you contribute $10,000 and your employer contributes $10,000 on your behalf, you could still defer an additional $7,000 from your paychecks and the total remaining contributions between you and your employer could not exceed $30,000. However, if you contributed $10,000 and your employer contributed $40,000, you would not be able to contribute any more because even though you didn't reach your elective deferral limit, any additional contributions would put you over the total contribution limit.

Catch-Up Contributions

Catch-up contributions, which are a special contribution allowed for employees age 50 and older, are not affected by the annual contribution limits. For example, say you are eligible to make a catch-up contribution of $5,500 and your total contribution limit is otherwise $50,000. If you and your employer have already contributed $50,000, you can still put in an additional $5,500 because catch-up contributions are on top of your other allowable contributions.

Excess Contributions

If your contributions plus those of your employer exceed your annual limit, the IRS penalizes you by disallowing the deduction for the contributions. In addition, you have to pay taxes on the money when you take it out of the 401(k) plan, so you are effectively being taxed twice on the same income. To avoid this, you have to remove the excess contributions by April 15. The April 15 deadline remains the same even if the tax filing deadline is pushed back due to a weekend or holiday.