The 2011 401k maximum contribution limits did not increase a single cent from 2010. These limits are set by the Internal Revenue System (IRS), the agency responsible for implementing tax laws in the US, to determine yearly benefits and contributions. The limits are indexed according to the yearly increases in cost of living, and the IRS has retained the contribution limits from last year since they found that there was relatively low inflation rate from 2010 to 2011.
The pre-tax 2011 401k maximum contribution or elective deferral, which is the official term used in the US to refer to the voluntary contributions to pensions and benefits of employees, is still at $16,500 for those who have a traditional or a safe harbor 401k plan.
The traditional 401k plan lets employees who are eligible to participate in the plan to give pre-tax deferrals via payroll deductions. Their employers can choose if they wish to contribute on behalf of all employees participating in the plan or to match contributions based on employees’ elective deferrals. They can also contribute using the two options at the same time. In this plan, the employer also needs to satisfy non-discrimination requirements, meaning their matching contributions and their employees’ deferrals do not favor highly compensated employees.
The safe harbor 401k plan, on the other hand, does not require any annual non-discrimination verification tests. More importantly, safe harbor plans require employers to have employer contributions to be fully vested and to grant employees’ eligibility to participate in the plan.
But for SIMPLE 401k plans, the pre-tax 2011 401k maximum contribution is $11,500. SIMPLE 401k is provided by employers with 100 employees, at the most, who got a minimum compensation of $5,000 in the previous year. This plan is similar to safe harbor, but could not be combined with any other employer benefit or retirement plan.
Your 401k elective deferrals are not limited to your pre-tax contributions, however. If you are 50 years old and above, you may take advantage of the catch-up contribution, which is the added benefit exclusively for employees who are nearing the retirement age. The 2011 40k maximum contribution for this catch-up benefit is $5,500 for those in the traditional or safe harbor 401k plan. Those who are participating in the SIMPLE 401k plan has a catch-up contribution limit of $2,500.
Aside from the pre-tax and catch-up deferrals, there are still a couple of ways to increase the value of your 401k – your employer’s and your post-tax contributions. To maximize the benefits of your 401k plan, ask your employer about these additional ways to increase your 401k contributions.