It's an important distinction that the limit is based on total compensation, which includes employer contributions to a 401(k) plan and not just salary.
That income limit doesn't mean anyone making more than $350,000 in 2025 (or $345,000 in 2024) is ineligible to contribute. It only means any amount of compensation above the limit isn't eligible for contribution.
Employees making more than the limit can still contribute the maximum salary deferral to their employer's 401(k) plan. However, the employer's matching contribution will apply only up to the limit.
For example, if you're paid $500,000, and your employer also offers a 5% match on your 401(k) salary deferrals, you can contribute $23,500 in 2025. Your employer match will only be $17,500, though, instead of the full $25,000, or 5%. That's because it's limited by the $350,000 compensation limit for 2025. Even though 5% of $500,000 is $25,000, 5% of $350,000 is only $17,500.
In rare cases, such as when 401(k) plans are poorly written, employees find their own contributions affected in a different way by the income restrictions. If the plan states employees can defer salary up until they reach the annual income limit, they won't be able to contribute anything near the end of the year after they surpass that limit. If this is the case with your plan, ask your HR department to change the wording of the plan so you can make contributions throughout the year. In the meantime, be sure to contribute earlier in the year.
