Limits on Employer Contributions to Retirement Plans

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Limits on Employer Contributions to Retirement Plans

Your retirement investments can add up to a sizeable nest egg after 20 or more years, particularly if your employer also contributes to your savings. Here are the allowable employer contributions for several common retirement plans.

401(k) plans

For a 401(k) plan, employer contributions are limited, as a practical matter, by the limit on the employer’s tax deduction for those contributions, as a wage and compensation expense. The employer’s deduction for additions to the plan is limited to 25% percent of its total payroll for all employees covered by the plan. "Additions" include both employee elective salary reductions and employer matching contributions and can total up to the lesser of $70,000 per year in 2025 or 100 percent of compensation. Employer contributions, however, are not required.

SIMPLE IRAs

If your employer offers a SIMPLE IRA, he or she generally must match your contribution up to 3 percent of compensation. To provide occasional flexibility, however, the employer can elect a matching contribution that is less than 3 percent—but at least 1 percent—for up to two years during the five-year period ending with (and including) the year for which the election is effective. Because the employee’s contribution to a SIMPLE is limited to $16,500 in 2025, the maximum employer match is likewise limited. Alternatively, your employer may make a fixed contribution of 2 percent of compensation. If your employer elects the fixed contribution, he or she must make the 2 percent contribution for all employees with at least $5,000 in compensation, whether they contribute or not.

SEP IRAs

If you participate in a SEP IRA, your employer may contribute a maximum of 25 percent of your compensation. If you also contribute to the account, you and your employer’s combined contributions may not exceed $70,000 in 2025. (Note, however, that employee contributions are not allowed at all for SEPs created after 1996.) Also, be aware that the Internal Revenue Code does not require your employer to contribute to a SEP IRA every year.

Keogh (HR-10) plans

If you have a Keogh plan that is a defined contribution plan (for example, a money purchase plan or a profit-sharing plan), your employer may contribute up to the smaller of $70,000 in 2025 or 100 percent of your compensation. If you participate in a Keogh plan that is a defined benefit plan, your employer may contribute no more than the amount needed to fund an annual retirement benefit that is no larger than the smaller of $280,000 in 2025 or 100 percent of your average taxable compensation for your highest three consecutive years.

403(b) plans

If you participate in a 403(b) plan, combined employee and employer contributions may not exceed the lesser of $70,000 in 2025 or 100 percent of your annual compensation. 403(b) plans are offered by non-profit organizations, such as schools, hospitals, and churches.

Your employer’s contributions can help you build a retirement nest egg faster than you could with only your own contributions. Taken together, employer and employee contributions can provide a sizeable accumulation and a sizeable portion of your retirement income.