Contributing to a 401(k) account at work lets you save for retirement tax free. On top of that, your employer can make added contributions to your account. The total contributions for the year can't be more than your gross pay. To know how much that is, you have to know how gross pay is defined.
Gross Pay Defined
Gross pay is your total compensation. It includes wages, salaries, bonuses, commissions, tips, sick pay, holiday pay and vacation pay. To calculate gross pay, you figure all of these without taking into account the taxes you pay or any pre-tax deductions in your paycheck. Your 401(k) contributions are pre-tax income, but they still count as part of your gross pay. Your gross pay may be different from your gross income. Gross income includes such non-pay sources of money as royalties, alimony, pensions and inheritance.
As long as you contribute less than the legal limit to your account -- $17,500 as of 2014, plus $5,500 if you're over 49 -- your contributions are gross income but not taxable income. If by some mistake you contribute over that amount, the excess is taxable. Your employer's matching contribution doesn't count as gross income and doesn't show up on your W-2 at the end of the year. Your 401(k) account annual statements keep track of it.
Gross Pay's Importance
Along with matching a percentage of your contributions, your employer can make extra contributions as well. The amount of these other contributions can be whatever the employer sets, as long as they conform to the terms of the plan. Here's where the amount of your gross pay becomes significant: the total contributions to your 401(k) each year can't be more than your total gross pay. If your gross pay is, say, $78,000, your 401(k) deposits combined with your employer's contributions cannot go above that.
Staying Within Limits
Most employees don't have to worry about hitting the gross-pay limit on 401(k) contributions. It's top management and key employees who are most likely to get generous employer contributions and so have to think about about how much their gross pay is. The IRS also imposes other limits, besides gross pay, to prevent plans becoming "top heavy" -- having more than 60 percent of their value in the accounts of key employees. To stay below this point, employers can either reduce compensation to key players or contribute more to the other accounts.
A Durham, NC resident, Fraser has written about law, starting a business, balancing your budget and fighting evictions, among other legal and financial topics.