To make it easier to understand and track the contribution limits imposed by the IRS, it may be helpful to think of the limits in terms of layers. For example:
- Layer 1 — the limit imposed on the employer. For profit sharing plans, the total employer contributions cannot exceed 25% of aggregate eligible compensation of all eligible employees (401(k) elective salary deferral contributions are not included in employer contributions for this limit). For money purchase pension plans, the total employer contributions allowed is also limited to 25% of aggregate eligible compensation. Bear in mind that the employer can meet this 25% limit in one plan or as a combination of contributions in multiple plans, but in no event can the employer exceed 25% of aggregate compensation.
- Layer 2 — the limit imposed on the participant (known as the “annual additions limit”). For all contributions (including pre-tax elective contributions, after-tax employee contributions and Roth 401(k) contributions) to all employer plans in which the individual participates, contributions (and any forfeitures allocated to a participant’s account) cannot exceed the lesser of 100% of the participant’s eligible compensation and a prescribed indexed dollar amount. For 2015, the limit is the lesser of 100% of the participant’s eligible compensation and $53,000.
- Layer 3 — the dollar limit for elective contributions (including pre-tax elective contributions and Roth 401(k) contributions). This dollar limit is indexed each year. The limit is $18,000 for 2015. The catch-up contribution limit for 2015 for a participant who attains age 50 before year-end is $6,000, for a total of $24,000.