The annual compensation limit, also known as the 401(a)(17) limit, sets a maximum amount on how much of an employee's compensation can be used to determine an employer's nonelective contribution or match to the employee's 401(k). This limit is set by law and may be adjusted by the IRS each year.
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If you are a highly paid employee, then you’ll want to pay special attention to this limit, as it will affect how much of your employer’s contributions you can receive for the year.
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For 2025, the annual compensation limit is $350,000 (up from $345,000 in 2024).

Here's an example of how this limit would apply:

If you earn $500,000 in 2025, and your company’s 401(k) plan provides a match of 100% of employee deferrals up to a maximum of 5% of compensation, the company matching contributions will be capped at $17,500 (5% x $350,000), rather than $25,000 (5% x $500,000). The remaining $150,000 of your 2025 compensation will not be taken into account for any purpose under the plan.
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All employer contributions for a single year must be determined by taking into account only the amount of a participant’s compensation, up to the compensation limit for that year. Employer contributions may include profit sharing, non-elective, safe harbor, and matching contributions.
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Similarly, where applicable in performing the nondiscrimination testing (e.g., the ADP and ACP tests) for a single year, each participant’s reported compensation must be capped at the compensation limit. For example, only compensation up to the dollar amount for that year will be applied in performing these tests.
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For new plans with short plan years (that don’t begin on January 1), the annual compensation limit must be prorated by the number of full months of the short plan year.
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Visit the IRS site to learn more.