18

I would like to ask a specific question regarding employer limitations on 401k contributions. I have read other posts in the forum that explain that limitations often exist on highly compensated employees depending on the contribution level of lower paid employees. I belive this not to be the case in my situation.

I am a graduate student and I am able to live and contribute $5,500 to a Roth IRA each year on my graduate stipend. I also work a part-time teaching job that has a very high hourly wage, but due to the small number of hours brings in only about $1,500 of income per month. The company through whom I do the part-time teaching offers a 401k, but the contribution limit is capped at 25%. They do not provide matching funds to employees. Were I able, I would put almost all of the income from this job in the 401k.

Is the employer within their right to restrict the contribution to 25%?

Chris W. Rea
  • 31,999
  • 17
  • 103
  • 191
EMILY
  • 183
  • 1
  • 6

1 Answers1

16

Yes, they are within their rights to do so. The dollar limit of $18,000 (in 2015) and percentage limit of 100% are the maximum an employer can allow an employee to contribute, but the employer can set a lower limit.

http://www.smart401k.com/Content/retail/resource-center/retirement-investing-basics/maximum-contribution-limits says:

Contribution limits refer to the legal IRS limitations. Some companies cap 401(k) contributions at amounts lower than official IRS contribution limits. There are numerous reasons a company would enforce such limitations, like cost, accounting or an outdated plan document.

In theory an employer can set a lower percentage and/or lower absolute dollar limit. In practice I've seen the former but never the latter.

Depending on your employer's reason for setting the lower limit, you may be able to convince them to raise it.

stannius
  • 5,367
  • 31
  • 37