Dear Dr. Don,
I am a 43-year-old employee, working full time for a new employer, and I have a 401(k) retirement planning question.

I have a 401(k) plan that lets me contribute — tax-deferred — anywhere from 1 percent to 20 percent of my salary to the plan. My employer also contributes a 50 percent match of the first 10 percent of my salary.

I have met all the qualifications to contribute to the plan and receive the match, and I (unfortunately) do not fall into “highly compensated” status. This is all pretty standard — or so I thought.

I believe the Internal Revenue Service limits my tax-deferred contribution to $16,500 per year, not including any catch-up contributions for those over 50. Thus I have made my deduction election (18 percent of salary) to equal just under the $16,500 limit by the end of the year.

However, my employer says the $16,500 limit is for total contributions (employee contributions plus employer match). They refuse to budge, and will not let me contribute the desired amount. Their issue is IRS limits, as the plan document itself has nothing that prevents such a contribution.

So who is right? A clarification from you might help them (or — gulp — me) see the light.
— Matt Maintains

Dear Matt,
You’re right, but you’re going to need more than the good doctor’s word to convince your employer, because I can’t provide them (or you) with tax advice. The IRS press release “IRS Announces Pension Plan Limitations for 2010” describes the basics, with excerpts presented below:

The limitation for defined contribution plans under Section 415(c) (1) (A) remains unchanged for 2010 at $49,000.

The limitation under Section 402(g) (1) on the exclusion for elective deferrals described in Section 402(g) (3) remains unchanged at $16,500.

As you described the particulars of your employment, in 2010 you can contribute up to $16,500 and your contribution combined with your employer’s contribution can’t exceed $49,000. These contribution limits are adjusted annually for inflation.

The U.S. Code, Title 26 § 415 Limitations on benefits and contribution under qualified plans, provides the details under the heading “Limitation for defined contribution plans.”

Congratulations on the new job and keep growing those retirement funds!

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