To a certain extent, 401(k) regulations allow employers to determine what is defined as "eligible compensation/pay" for contributions to a 401(k) plan. For instance, some plans may include overtime pay in the definition of compensation for 澳洲幸运5官方开奖结果体彩网:salary deferral purposes, while others may not. Indeed, many may only include so-called "straight time pay" (i.e., earnings from working normal hours).

💙Understanding 401(k) Contriꦿbutions and Compensation

The definition of what compensation should be included for salary deferral is laid out in the 401(k) or retirement plan documents. The definition of eligible compensation will be outlined in the documents and it can vary from one plan to another.

For example, assume that the plan does not include overtime in the definition of compensation and limits yܫour salary deferral to 10% of your compensation. If you earn $10,000 as regular (straight time) pay and $1,000 in overtime, you would be allowed to defer up to $1,000 to your 401(k) because your limit will be 10% of your straight time pay.

Wrongfully Excluding Compensation

Employers can make mistakes by excluding certain forms of compensation if they’ve selected a plan that should cover all forms. Often, mistakes are made on the employer's end by excluding such compensation as commissions, overtime, or bonuses.

Mistakes made by employers using the wrong compensation can be expensive to fix. Generally, 401(k) and other 澳洲幸运5官方开奖结果体彩网:retirement plans include one of three options for defining compensation. The first is W-2 wages. The second is 3401(a) wages, which is all compensation subject to federal income tax. The third is 415 safe harbor, which is not used for taxation but includes pre-tax salary deferrals. 

These three options can include or exclude certain forms of compensation. This can include fringe benefits, such as reimbursements, moving expenses, or deferred compensation. Other exclusions can include pay earned before the employee became plan-eligible. As well, compensation paid to highly compensated employees can be excluded.

401(k) Contributions

Money contributed to 401(k) plans is subject to limits set by the Internal Revenue Service (IRS). The annual contribution limit for 401(k) accounts is $22,500 in 2023 (increasing to $23,000 in 2024). Those 50 and older can contribute an extra $7,500 for both 2023 and 2024, called a 澳洲幸运5官方开奖结果体彩网:catch-up contribution.

Including the employer’s contributions to an employee’s account, there’s a $66,000 combined employer-employee limit for contributions for 2023 ($73,500 including catch-ups). This amount increases to $69,000 in 2024 ($76,500 including catch-ups).

Special Considerations

The general rule of thumb is to 澳洲幸运5官方开奖结果体彩网:co💮ntribute at least 10% of your gross income to your 401(k). In some cases, employers will offer a 澳洲幸运5官方开奖结果体彩网:matching contribution. In that case, it’s advised to contribute enough to get t꧑he maximum matching contribution.

For example, the typical match is 50% of the employee's first 6% contribution. So, if an employee contributed 6%, the employer would contribute 3%.

If you cannot contribute as much as you would like to, all is not lost. If you have extra funds you want to save in a 澳洲幸运5官方开奖结果体彩网:tax-advantaged retirement account, you may consider contributing to an 澳洲幸运5官方开奖结果体彩网:individual retirement account (IRA꧟).

There are traditional IRAs and 澳洲幸运5官方开奖结果体彩网:Roth IRAs. The contribution limit on IRA contributions for tax year 2023 is $6,500 ($7,000 for 2024), with a $1,000 catch-up contribution for those 50 or older.

The Bottom Line

401(k) plans are a great way to save for retirement. The type of compensation that you can contribute is determined by your employer, whether thatꦯ be either straight pay, overtime pay, bonuses, or🐼 all. The best approach is to contribute as much as you can to ensure a well-funded retirement.