Types of Contributions
Four different types of contributions can be made to 401(k) plans — each with its own vesting and distribution rules. Of the four types, only elective contributions are required to establish a 401(k) plan. The other options may be added to make plans more attractive to employees and to increase tax-sheltered amounts, but are not required.
Elective contributions are amounts contributed to the plan based on employees’ elections, instead of being paid as cash. Employees are not currently taxed on these amounts. Elective contributions and the income earned on them must be fully vested at all times, but are subject to restrictions on premature withdrawals.
Under some plans, employees may make additional contributions — typically a fixed percentage of salary — through payroll deductions. These contributions are included in the employee’s taxable income, but plan earnings attributable to them are not taxed until distribution. These contributions must be fully vested when made and may be withdrawn at any time without restriction.
Some employers make additional contributions for every dollar employees elect to contribute. No particular matching formula is required, as long as it does not result in discrimination or contributions exceeding statutory maximums. Common examples include dollar-for-dollar matches or 50-cents-on-the-dollar matches. Matching contributions may be subject to deferred vesting schedules and restrictions on premature withdrawal.
Nonelective contributions are employer contributions made regardless of any employee election or contribution. They are generally computed on the basis of the employer’s profits and allocated among employees in proportion to their salaries. These contributions are subject to restrictions on premature withdrawal and may be subject to deferred vesting.
The following table summarizes the key differences among contribution types:
| Type | Source | Tax Status | Vesting | Plan Restrictions | On Withdrawal |
|---|---|---|---|---|---|
| Elective deferrals | Employee compensation | Excluded from income; deductible by employer (“before tax”) | 100% immediate | Yes | Fully taxable |
| Voluntary contributions | Employee compensation | Included in income; not deductible (“after tax”) | 100% immediate | No | Earnings portion taxable |
| Matching contributions | Employer | Excluded from income; deductible by employer (“before tax”) | Employer may impose delay | Yes | Fully taxable |
| Nonelective contributions | Employer | Excluded from income; deductible by employer (“before tax”) | Employer may impose delay | Yes | Fully taxable |
Kyle Miller earns $32,000. He defers 9% ($2,880 elective + voluntary over the 6% base), and his profit-sharing allocation is $1,500. Employer matching: 100% of $1,920 + 50% of $960 = $2,400.
| Contribution Type | Amount |
|---|---|
| Elective deferral (6% of $32,000) | $1,920 |
| Voluntary after-tax (3% of $32,000) | $960 |
| Matching contribution | $2,400 |
| Nonelective (profit-sharing) | $1,500 |
| Total contributions | $6,780 |
Dollar Limits on Contributions (2026)
The tax code places three separate limits on 401(k) contributions: (1) a limit on total annual additions per participant, (2) a limit on elective deferrals, and (3) a limit on the compensation that may be considered when calculating contributions.
The total “additions” an employer may make on behalf of an employee to all defined contribution plans is the lesser of:
- 100% of the employee’s taxable compensation (net of elective deferrals), or
- $70,000 (2026 inflation-adjusted limit)
This “100% / $70,000 rule” applies to all additions including elective and voluntary contributions, matching and nonelective employer contributions, and forfeitures allocated to the account.
Forfeitures occur when an employee terminates employment with unvested balances. Those unvested amounts must remain in the plan and are typically reallocated among remaining participants based on compensation levels.
The tax code limits the amount of compensation an employer may consider when calculating contributions. For 2026 the compensation cap is $360,000. Only the first $360,000 of an employee’s compensation may be used when calculating matching or nonelective contributions. This limit also applies when allocating forfeitures and applying nondiscrimination tests.
Employee A earns $400,000 and defers 5% ($20,000). The employer may only match based on $360,000: match = $18,000 (5% × $360,000), not the “full” $20,000.
Employee B earns $500,000. The employee may only defer $24,500 (the flat dollar limit). The employer match is still capped at $18,000 (5% × $360,000).
A separate aggregate limit applies to elective deferrals across all 401(k) plans, 403(b) annuities, SARSEPs, and SIMPLE plans in which the employee participates. For 2026:
| Age | 2026 Elective Deferral Limit |
|---|---|
| Under age 50 | $24,500 |
| Age 50–59 / Age 64+ | $32,500 ($24,500 + $8,000 catch-up) |
| Age 60–63 (SECURE Act 2.0 super catch-up) | $35,750 ($24,500 + $11,250) |
This limit applies per employee, not per plan. If an employer maintains more than one such plan, the employer is responsible for enforcing the aggregate limit. If an employee contributes excess amounts across plans of different unrelated employers, the plans are not disqualified — but the employee is taxed on the excess. If the excess occurs within a single employer’s plans, the plan itself may be disqualified unless corrective action is taken.
Employees age 50 and older may contribute additional elective contributions as a “catch-up” provision. SECURE Act 2.0 introduced an enhanced “super catch-up” for employees who reach age 60, 61, 62, or 63 during the plan year. Catch-up contributions:
- Are exempt from the regular dollar limit on elective deferrals
- Apply per employee (not per plan) across all eligible plans
- Must be specifically permitted by the plan document (most plans allow them)
- Employers may choose whether or not to match catch-up contributions
| Contribution | Amount |
|---|---|
| Elective deferral (5% × $78,000) | $3,900 |
| Matching (dollar-for-dollar) | $3,900 |
| Voluntary after-tax (6% × $78,000) | $4,680 |
| Nonelective (profit-sharing) | $5,400 |
| Share of forfeitures | $1,000 |
| Total additions | $18,880 |
Deposit of Contributions
Employers must deposit employee contributions (elective and voluntary) into the plan as soon as these amounts can reasonably be segregated from the employer’s general assets. The deposit must be made no later than the 15th business day of the month following the month in which contributions were withheld or received by the employer.
401(k) plans are subject to the separate accounting rule, requiring a separate account for each participant and separate accounting for employer and employee contributions. Gains, losses, withdrawals, and other credits or charges must be allocated on a reasonable and consistent basis — not in favor of highly compensated employees. Employers who maintain only one account per employee must treat all contributions as 100% vested.
Tax Treatment of Employee Contributions
Generally, elective, matching, and nonelective contributions are not included in taxable income as long as they do not exceed the annual contribution limits or violate the nondiscrimination rules. Voluntary after-tax contributions come from already-taxed compensation and may not be deducted.
Elective contributions are excluded from federal income tax and withholding calculations, but are included in the Social Security (FICA) and Federal Unemployment (FUTA) wage bases.
Employees who exceed the dollar limit on elective deferrals and do not correct the error face:
- The excess deferral is taxed in the year of contribution
- The excess is retained in the plan and taxed again when distributed
- Any excess retained past the following April 15 is subject to premature withdrawal penalties
If the excess occurs across plans of two or more unrelated employers, the employee must notify each employer how the excess is to be allocated no later than March 1st of the following year.
Tax Treatment of Employer Contributions
Within limits, an employer may deduct elective, nonelective, and matching contributions to employees’ 401(k) accounts as employee compensation, provided total compensation is “reasonable.” Deductions are allowed for the plan year if monies are deposited no later than the employer’s tax filing date (including extensions).
Deductions for elective and matching contributions must relate to compensation earned during that tax year. For example, an employer on a July–June fiscal year may only deduct contributions attributable to compensation earned through June 30; contributions tied to compensation earned after June 30 are deductible in the following tax year.
Employers may deduct up to 25% of the total compensation of all eligible plan participants as a business expense. This 25% limitation applies to the employer’s aggregate payroll of eligible employees. Elective, matching, and nonelective contributions are all treated as employer contributions for this purpose.
Any contribution in excess of the 25% limit is made from after-tax profits, and the employer must pay a 10% excise tax on the excess.
Many employee benefits are keyed to compensation. When an employee defers compensation into a 401(k), it may reduce the base used to calculate other benefits. For example, a defined benefit pension calculated as a percentage of final compensation could be reduced if the plan defines compensation net of elective deferrals.
Pension impact: 80% × $40,000 = $32,000 vs. 80% × $37,600 = $30,080 — a reduction of $1,920/year.
Disability impact: 50% × $40,000 = $20,000 vs. 50% × $37,600 = $18,800 — a reduction of $100/month.
Note: Social Security computes benefits on the full wage base including elective deferrals, so 401(k) contributions do not reduce Social Security benefits.
Employment Taxes
The tax treatment of 401(k) contributions for employment tax purposes is as follows:
- Elective contributions: Excluded from federal income tax and withholding, but included in FICA (Social Security/Medicare) and FUTA (federal unemployment) wage bases
- Voluntary after-tax contributions: Subject to FICA and FUTA taxes
- Matching and nonelective employer contributions: Not subject to FICA, FUTA, or federal income taxes