401(k) Contribution Limits: A Walk Down Memory Lane

Posted by Maria Hurd, CPA

Disclaimer: All blog posts are valid as of the date published.

Internal Revenue Code Section 401(k) was added to the tax law as part of President Jimmy Carter’s Revenue Act of 1978. For the first time, employees had an option to defer their taxes, but the choice did not gain much traction until 1981, when the IRS issued proposed regulations clarifying the sources of income that were valid for 401(k) contributions. Small employers could now offer a retirement savings alternative that allowed participant contributions and the number of employees eligible to participate in 401(k) plans grew exponentially.

Since the 401(k) plan has become the primary tax-deferral retirement savings vehicle in the United States, we thought it would be interesting to look at the historical limits and see how they have evolved from allowing employees to defer up to the annual addition limit to limiting employee contributions to a portion of the permitted contribution total, then gradually increasing the gap between the total contribution limit and the deferral limits.

The Tax Reform Act of 1986 reduced the individual deferral limit by 77% from $30,000 to $7,000 and today, 31 years later, the individual deferral limit is still only 60% of the pre-TRA 86 limitation.  As the new administration endeavors to find additional tax revenue, it is possible that the limits could drastically change again. We will have to see what develops.