Some 401(k) plans have extra contribution limits on employees who are highly compensated. (If your employer has set up a Safe Harbor 401(k) plan and you are a high earner, these limits may not apply to you.)
Highly compensated employees (HCEs) can contribute no more than 2% more of their salary to their 401(k) than the average non-highly compensated employee contribution. That means if the average non-HCE employee is contributing 5% of their salary, an HCE can contribute a maximum of 7% of their salary. In addition to the federal limit, your company may have specific caps established to remain compliant.
The IRS determines you are a HCE if:
Either you owned 5% or more of a company last year and are participating in its 401(k) plan this year.
Or you earned $150,000 or more in 2023 from a company with a 401(k) plan you’re participating in this year.
Unlike most other 401(k) limit guidelines, HCE classifications are based on your status from the previous year.
If HCE contribution rates exceed non-HCE contribution rates by more than 2%, companies’ workplace retirement plans may lose their tax-advantaged status. As a HCE, you may be prevented from contributing to your 401(k) to the employee contribution max due to low 401(k) participation rates. You should still be able to make catch-up contributions on top of your HCE cap if you are eligible, though.
If you’re capped by HCE limits but still want to contribute more, consider funding a retirement account outside of your employer-sponsored plan, such as a traditional IRA.