401(k)
A 401(k) is an employer-sponsored retirement plan funded through payroll deferrals the employee elects, usually alongside an employer contribution.
- LAW
- 26 U.S.C. §401(k); deferral limit in §402(g)
- RATE
- The percentage or flat amount the employee elects
- CAP
- $24,500 in 2026, traditional and Roth combined
- WATCH FOR
- Leaving traditional deferrals out of FICA wages
The employee elects a deferral, a percentage of pay or a flat amount, and you withhold it each pay run. Traditional deferrals generally reduce federal income tax wages now. A Roth 401(k) is a designated Roth account inside the same plan, and its deferrals are taxed as the pay is earned. Both kinds generally stay inside Social Security, Medicare, and FUTAFUTA. FUTA is the federal unemployment tax you pay on the first $7,000 of each employee’s wages a year, with nothing withheld from pay.Click to open the term wages. One annual limit covers them together, and the employee chooses the split.
How does a deferral change taxable wages?
The deferral type decides which withholding applies, and an employer matchEmployer match. An employer match is the plan contribution you add on account of an employee’s deferrals, usually a percentage of them up to a pay cap.Click to open the term stays outside both. State treatment follows state law. Pennsylvania, for one, includes deferrals in taxable compensation when they are contributed. Confirm a specific plan’s treatment with the IRS or a qualified tax professional.
| CONTRIBUTION | FEDERAL INCOME TAX WITHHOLDING | SOCIAL SECURITY AND MEDICARE |
|---|---|---|
| Traditional deferral | No | Yes |
| Roth deferral | Yes | Yes |
| Employer match | No | No |
What are the 2026 limits?
One elective deferral limit covers traditional and Roth deferrals together. It generally counts deferrals to every plan the employee joins, but not 457(b) plans. Your payroll cannot see a prior employer’s. The same deferral limits generally apply to 403(b) plans, which public schools and certain 501(c)(3) organizations offer. For 2026, catch-up contributions generally must be Roth when the employee’s 2025 wages from you exceeded $150,000. SIMPLE 401(k) plans generally have lower limits: $17,000 in 2026. Their 2026 catch-ups are generally $4,000, or $5,250 at ages 60 to 63.
| LIMIT | AMOUNT |
|---|---|
| Elective deferrals, traditional and Roth combined | $24,500 (2026) |
| Catch-up contributions, age 50 and over | $8,000 (2026) |
| Higher catch-up, ages 60 to 63 | $11,250 (2026) |
| Employee and employer contributions combined, before catch-up | $72,000, or 100% of pay if less (2026) |
| Compensation a plan can count | $360,000 (2026) |
What does payroll need to run a 401(k) deduction?
A 401(k) deduction is configuration, not one field. Payroll needs the deferral type, the amount, the match rule, the annual limit, catch-up treatment, the deduction order, and the provider transmission. The employee deferral and your employer contribution each carry their own year-to-date balance. After a provider change, validate the converted balances as well as future deductions. A deduction withheld does not prove the funds arrived, so reconcile totals against what the provider accepted.
Who is a highly compensated employee, and what is a SEP IRA?
For 401(k) testing, a highly compensated employee (HCE) owned more than 5% of the business this year or last, or, for 2026 status, had compensation from you over $160,000 in 2025. You may elect to limit the pay test to your top-paid 20% of employees. Traditional 401(k) plans must pass yearly ADP and ACP nondiscrimination tests so deferrals and matches do not favor HCEs; safe harbor 401(k) plans generally skip them. A SEP IRA (simplified employee pension) is an alternative any business can set up, funded by employer contributions.
| FEATURE | TRADITIONAL 401(K) | SEP IRA |
|---|---|---|
| Who contributes | Employees, plus any employer contribution | Only you |
| Limit per employee | $72,000 (2026), or 100% of pay if less, before catch-up | $72,000 (2026), or 25% of pay if less |
| Yearly testing | ADP and ACP tests, unless safe harbor | No ADP or ACP test; generally one uniform percentage of pay |
| Payroll taxes on contributions | Deferrals generally stay in Social Security and Medicare wages; the match does not | No federal income tax withholding, Social Security, Medicare, or FUTA |
Frequently asked
- Retirement topics - 401(k) and profit-sharing plan contribution limits
- Retirement topics - Catch-up contributions
- Retirement plans FAQs on designated Roth accounts
- Retirement plan FAQs regarding contributions - Are retirement plan contributions subject to withholding for FICA, Medicare or federal income tax?
General information, not legal or tax advice. Apply current federal and state rules with qualified guidance.