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%?

  • FYI, my employer does the same, my wife's does not.
    – Pete B.
    Jun 24 '15 at 19:51
  • Rights? Rights don't really play into this. An employer doesn't have to match anything at all if they don't want to. What rights are you talking about?
    – user91988
    Aug 6 '20 at 14:27

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 There are numerous reasons a company would enforce such limitations, like cost, accounting or an outdated plan document.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.

  • 7
    A common reason is avoid their investment plans being "top heavy", which has legal and tax implications. The company doesn't want its 401(k) program to be seen as a way to primarily give additional benefits to its most highly compensated employees.
    – JAGAnalyst
    Jun 24 '15 at 18:48
  • 6
    My employer used to only allow a 15% contribution. A couple of us asked for this to be increased and they were willing to do so. It's now 90%. So you may have luck simply asking for a change.
    – Paul
    Jun 24 '15 at 20:03
  • 4
    I requested my company to increase our 401k percentage too. In a lot of cases it's because (nearly) no one is saving for retirement and so the "cap" is something which was arbitrarily created and no one ever actually contributed that much.
    – enderland
    Jun 24 '15 at 23:01
  • Thank you all for this feedback! Other than the issue of the 401k disproportionately benefitting highly compensated employees - which I don't believe applies the plan for part-time employees in which I participate - what are some other reasons that employers set a low maximum contribution level? I think that I may try asking for an increase in the cap, so knowing the potential counterarguments could help me make my case!
    – EMILY
    Jun 25 '15 at 16:27
  • I think we've covered most of the possible reasons already. If I had to guess, I'd guess that the #1 reason companies limit to a percentage is that they didn't imagine any employees wanting to contribute more than that. But you won't know until you talk to HR.
    – stannius
    Jun 25 '15 at 19:17

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