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The 2014 employee contribution limit is $17,500.

The 2014 total contribution limit is $52,000.

(Provided they're not capped earlier based on low income.)

Meaning the IRS has left room for a ~$35,000 employer contribution, a 2:1 match with no limit.

This seems a bit excessive. I was able to find a survey which said the average company contribution in the top 30 plans was over $31,000, so apparently there are companies, and their employees, who are contributing to the max, but I think the average company match is much lower.

Why is the gap between employee and total limit so high?

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Some companies, at some times, HAVE offered a 2:1 match to some employees... just as some have offered 2:1 match on some kinds of charitable contributions. What's average now -- or ever -- and what's been seen in the past are different things. – keshlam Jul 31 '14 at 3:22

2 Answers 2

up vote 9 down vote accepted

Because 401k's are also used by self employed. A person who has a schedule C profitable income can open a 401k and "match" in whatever ratio he wants, up to 25% of the net profits or the limits you stated. This allows self-employed to defer more income taxes to the future.

Why only self-employed? Good question. Ask your congressman. My explanation would be that since they're self-employed they're in much more danger of not having income, especially later in life, if their business go south. Thus they need a bigger cushion than an average W2 employee who can just find another job.

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The question of "why only self-employed" here does not make sense. Regular businesses can also match at very high ratios, so there is nothing special about the self-employed except that they are likely to choose a high matching ratio. The laws don't particularly favor the self employed in this respect. – farnsy Jul 31 '14 at 20:51
@farnsy the "favor" is that for self-employed it is their money on both sides, while for regularly employed their money is only on the 17.5K side. I would like to be able to contribute up to $50k or 25% of my earnings - but I'm not self-employed, so I cannot. – littleadv Aug 1 '14 at 1:09

Some 401k plans allow you to make "supplemental post-tax contributions". basically, once you hit the pre-tax contribution limit (17.5k$ in 2014), you are then allowed to contribute funds on a post-tax basis. Because of this timing, they are sometimes called "spillover" contributions. Usually, this option is advertised as a way of continuing to get company match even if you accidentally hit the pre-tax limit.

But if you actually pay attention to your finances, it is instead a handy way to put away additional tax-advantaged money. That said, you would only want to use this option if you already maxed out your pre-tax and Roth options since you don't get the traditional tax break on contributions or the Roth tax break on the earnings. However, when you leave the company, you can transfer the post-tax money directly into a Roth IRA when you transfer the pre-tax money, match, and earnings into a traditional IRA.

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That last sentence is an important one. It's what I've seen called a "mega backdoor Roth contribution", is new for 2015, and allows you to effectively make a $58,500 (+$1k if 50 or older) Roth IRA contribution each year. – blm Nov 5 at 17:31
technically the "mega backdoor roth" as you call it has been around for a few years, but it moved from a tricky legal grey area into an officially approved irs procedure in 2015. although, they say it would be "reasonable" to assume it would be allowed in previous years, effectively making the ruling ex-post-facto. – james turner Nov 5 at 17:33
Ok, yes, you're correct, although I try to avoid "tricky legal gray areas" when it comes to taxes (or anywhere else :-) ). So maybe instead of "new for 2015", "officially approved for 2015". – blm Nov 5 at 17:37
Interesting. I have heard of this before but hadn't looked in to it too deeply, didn't realize it was above the "normal" contribution limit. – VBCPP Nov 5 at 19:40
it is worth noting that this provision is rather uncommon. and even if your plan offers it, you are likely to be limited by other factors. e.g. your income is too low for it to matter, or too high to avoid HCE limits, or the plan has a lower per-paycheck limit on contributions, or a lower per-year limit on contributions. – james turner Nov 6 at 16:28

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