Compensation limit (401(a)(17) limit)

What the compensation limit is

A qualified plan must ignore any pay above the annual compensation limit. For 2026 that figure is $360,000, up from $350,000 in 2025. The cap applies when the plan calculates employer contributions such as a match or profit sharing, and when it runs nondiscrimination tests.

For 2027 it rises to $375,000. (IRS Notice 2026-66)

The limit does not stop a high earner from deferring. An executive paid $500,000 can still defer up to $24,500 in 2026. What changes is how much pay the plan uses for formulas.

Why it matters to employers

Payroll systems calculate a match on whatever pay they are given. If your system does not cap plan compensation, executives receive more match than the plan allows, which is an operational error. The cap also levels the tests: a 3% contribution on $360,000 and on $900,000 is the same $10,800.

Example with 2026 figures

Your plan matches 100% of deferrals up to 4% of pay. A VP earns $450,000. The most match she can receive for 2026 is 4% of $360,000, or $14,400, not 4% of $450,000 ($18,000).

Common mistakes

• Stopping a high earner’s deferrals once their year-to-date pay passes $360,000. Whether deferrals continue depends on how the plan document applies the limit, and the IRS has a page on this exact point.

• Calculating the match each pay period without a true-up, so that someone who reaches the cap early is shorted or overpaid.

• Using the wrong year’s figure in a plan year that does not follow the calendar. The limit in effect at the start of the plan year applies.

• Using a definition of pay in payroll that differs from the definition of compensation in the plan document.