401(k) contribution limits are important benchmarks for creating effective retirement plans that help employees save adequately for the future. However, for highly compensated employees (HCEs), these limits often impose unique retirement readiness restrictions. In this article, Meghan Hannon, CRPS®, CPFA®, Partner and Head of Retirement Plan Consulting, demonstrates how these limits function and offers insights into maximizing HCEs’ retirement savings within regulatory constraints.
Changes in Annual Contribution Limits
The IRS revises contribution limits each year to reflect inflation, ensuring retirement plans remain relevant and effective. In 2025, employee contributions are capped at $23,500 for traditional (pretax) and Roth 401(k) plans, marking a $500 increase from 2024. For employees aged 50 or older, catch-up contributions allow for an extra $7,500, bringing the total possible contribution to $31,000. For HCEs, who may be capped by IRS nondiscrimination rules, it’s essential to maximize these limits each year.
Employer Contributions
Employer contributions like matching or profit-sharing don’t impact an HCE’s $23,500 contribution cap but do count toward the overall annual limit of $70,000 (or $77,500 with catch-up contributions). HCEs may find these contributions beneficial as they allow for added retirement savings without exceeding individual limits. A plan structured to leverage employer contributions properly can help offset the caps imposed on HCEs.
After-Tax Contributions
For plans that allow after-tax contributions, participants can take advantage of the combined annual cap, offering HCEs a way to increase tax-advantaged savings. With backdoor Roth conversions, after-tax contributions can be rolled into a Roth IRA, providing tax-free growth and withdrawals in retirement. While not every plan offers this option, it’s worth exploring if your workforce includes many high-income earners looking for additional ways to save. An experienced retirement plan advisor can help you discern the best options for your employer 401(k) plan and its participants.
Adjusted Catch-Up Contributions Under SECURE Act 2.0
The SECURE Act 2.0 introduces significant changes to retirement savings. Starting in 2026, any employees earning $145,000 or more must allocate catch-up contributions to Roth accounts, reducing immediate tax deferral while enabling tax-free growth for retirement. Beginning in 2025, employees between 60 and 63 can make super catch-up contributions of up to $11,250 in 401(k), 403(b) and 457 plans, providing a valuable savings boost during peak earning years. Plan sponsors should highlight these opportunities, focusing on the potential for long-term tax savings in retirement.
Supplemental Savings Options for HCEs
IRS nondiscrimination rules prevent HCEs from contributing disproportionately more than their peers. However, these constraints often cap HCEs’ contributions, negatively impacting their retirement readiness. For those limited by the IRS caps, offering a supplemental option like a nonqualified deferred compensation (NQDC) plan can help them continue building retirement assets beyond the standard limits.
Helping You Get There…
With the SECURE Act 2.0 changes and tailored plan options, HCEs can better navigate retirement savings challenges and maximize available benefits. For plan sponsors, structuring employer contributions, offering after-tax Roth options, and promoting catch-up contributions can enhance retirement readiness for their HCEs. Collaborating with an experienced wealth management advisor can also improve the effectiveness of your employer 401(k) plan and better support your participants’ long-term financial goals. Connect with Meghan to learn more about how Boulay Financial Advisors, LLC is helping you get there.
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