Compensation Limits That Cap Employer Contributions
There is a salary ceiling above which your employer's retirement plan must pretend you don't earn another dollar. It is called the §401(a)(17) compensation limit. For 2025 it is $350,000, and it quietly determines how much match a high earner actually receives.
What the limit does
Under IRC §401(a)(17), no qualified retirement plan may take into account compensation in excess of the annual limit when calculating contributions, allocations, or benefits. For 2025 the cap is $350,000 (up from $345,000 in 2024). It is indexed in $5,000 increments by reference to the Social Security wage base under §415(d).
Worked example: how the cap eats your match
Suppose your employer matches 50% of contributions up to 6% of pay. Your salary is $500,000. Naïvely the match should be 3% of $500,000 = $15,000. The §401(a)(17) cap forces the plan to substitute $350,000 for $500,000 in the calculation: 3% of $350,000 = $10,500. The "missing" $4,500 of match cannot be paid into the qualified plan at all — it has to be replaced, if at all, through a nonqualified deferred-compensation arrangement under §409A outside the plan.
Why it exists
The compensation limit was added in 1986 to prevent qualified plans from becoming pure executive-pay tools. Before 1986 a CEO earning $5 million could receive a profit-sharing contribution computed on the full $5 million, while a clerk earning $30,000 received one computed on $30,000 — and the plan's nondiscrimination tests still passed because the percentages were equal. Capping recognized compensation at a fixed dollar amount compresses the percentage and forces plans to be meaningful for rank-and-file employees.
The HCE definition
Separately, IRC §414(q) defines a highly compensated employee (HCE) as someone who earned more than $160,000 in the prior year (2025 figure, used in 2026 testing) or owned more than 5% of the employer at any time. HCE status governs nondiscrimination testing under §§401(k), 401(m), and 410(b). The HCE threshold is independent of the compensation limit — same source of inflation indexing, different ceiling.
Common mistakes
- Calculating match on actual salary. Payroll systems sometimes apply the match percentage to full pay, only to claw back the excess at year-end. Confirm with your benefits team how the formula treats the cap.
- Stacking SEP/profit-sharing percentages on uncapped compensation. SEP and profit-sharing percentages (often 25%) apply to compensation only up to $350,000, so the maximum employer SEP contribution for 2025 is the lesser of 25% × $350,000 = $87,500 or the §415(c) cap of $70,000 — meaning $70,000 is the real ceiling.
- Forgetting that 415(c) and 401(a)(17) interact. Even if compensation × match percentage exceeds $70,000, the §415(c) annual-additions cap still applies. The compensation limit constrains the inputs; the 415(c) limit constrains the output.
Sources
- Internal Revenue Code §401(a)(17), compensation limit (Cornell LII): law.cornell.edu/uscode/text/26/401
- Internal Revenue Code §414(q), highly compensated employee definition: law.cornell.edu/uscode/text/26/414
- IRS Notice 2024-80, 2025 plan-limit COLA table: irs.gov/pub/irs-drop/n-24-80.pdf
- Treasury Regulation §1.401(a)(17)-1, definition and application of the compensation limit: law.cornell.edu/cfr/text/26/1.401(a)(17)-1
- Internal Revenue Code §409A, nonqualified deferred compensation: law.cornell.edu/uscode/text/26/409A
RetirementCheck101 sizes your real match — after the §401(a)(17) cap — when your salary triggers it. Explore the free educational tool.