The annual addition limit is the total dollar amount that may be contributed to an employee’s retirement account (with the exemption of catch-up contributions) within a single plan year.
This total limit includes a combination of:
The employee’s personal pre-tax/traditional and Roth contributions
Employer contributions allocated to the account
Any forfeitures reallocated to the account (e.g., from the fully distributed accounts of terminated participants who were not fully vested at the time they terminated)
2024 annual additions limit
This year, annual additions must be equal to the lesser of:
100% of the participant’s annual compensation (after the compensation limit is applied), or
A total of $69,000 (up from $66,000 in 2023). Each year the allowable dollar amount may be adjusted by the IRS for changes in a cost-of-living index.
How the annual additions limit may cap total contributions
Due to the IRS additions limit, it is possible that participants with higher salaries or plans that offer generous employer contributions would be restricted in receiving all potential contributions to their account.
For example, say an employee earned $300,000 for 2024 and personally contributed the maximum allowable amount of $23,000. The plan offers a 4% match (100% match on up to 4% of their salary), which would equate to $12,000 ($300,000 x .04) in matching contributions for the year.
The plan also decides to offer a very generous 20% profit-sharing contribution at the end of the year. While 20% of $300,000 is $60,000, the plan is limited to contributing only $34,000 ($69,000 - ($23,000 + $12,000)) for this participant. Otherwise, total contributions would exceed the annual additions limit of $69,000.
What happens during a short plan year due to plan termination
If a plan is terminated during the middle of a plan year, the allowable dollar limit will be prorated based on the termination date for the year, per IRS regulations.
For example, if a calendar-year plan is terminated effective September 30, 2024, then the plan year is January 1 to September 30, 2024. The annual additions limit would then be prorated using the number of months the plan was active. In this case, the total limit for a participant would be $51,750 ($69,000 x (9/12)).