How do annual 401(k) contribution limits and catch-up contributions affect plan design?

How do annual 401(k) contribution limits and catch-up contributions affect plan design?

• A. They cap deferrals for all participants; catch-up contributions allow older workers to contribute more, affecting overall funding and nondiscrimination planning.
• B. They have no impact on plan design.
• C. They require separate accounts for each employee.
• D. They are adjusted to ensure automatic employer matching.

Answer: (A)

Annual 401(k) deferral limits set the maximum an individual can contribute from pay in a given year, and catch-up contributions allow workers who are older to add an extra amount beyond that limit. Plan design must work within these rules because the limits directly cap how much can come from employee deferrals and how much additional funding older participants can provide. That shapes the overall funding approach, including how generous the employer match can be and how contributions are allocated to keep the plan within nondiscrimination rules. Catch-up contributions can shift more of the plan’s funding toward older, typically higher-earning participants, which affects testing and the strategies used to pass ADP/ACP nondiscrimination tests. Some plans might use safe harbor features or adjust matching to ensure the plan remains compliant and fair across participants. The other options overlook this impact: these limits do influence plan design, they do not require separate accounts, and they are not about guaranteeing automatic employer matching.

Annual 401(k) deferral limits set the maximum an individual can contribute from pay in a given year, and catch-up contributions allow workers who are older to add an extra amount beyond that limit. Plan design must work within these rules because the limits directly cap how much can come from employee deferrals and how much additional funding older participants can provide. That shapes the overall funding approach, including how generous the employer match can be and how contributions are allocated to keep the plan within nondiscrimination rules. Catch-up contributions can shift more of the plan’s funding toward older, typically higher-earning participants, which affects testing and the strategies used to pass ADP/ACP nondiscrimination tests. Some plans might use safe harbor features or adjust matching to ensure the plan remains compliant and fair across participants. The other options overlook this impact: these limits do influence plan design, they do not require separate accounts, and they are not about guaranteeing automatic employer matching.