For 2001, the maximum pre-tax contribution a participant can make is $10,500 — subject to the 25 percent of pay limitation and special non-discrimination tests described below. The limit for 2000 was also $10,500. The IRS imposes this limit because Uncle Sam loses tax revenue for every dollar you contribute to your 401(k). The limit is periodically adjusted for inflation. If your plan allows you to make after-tax contributions, they are not included in this limit.

The percentage of pay limit stipulates that the maximum amount that can be accumulated in any of your tax-qualified defined contribution plans — 401(k), thrift, profit-sharing, ESOP, and money purchase — is limited to 25 percent of your gross pay or $35,000, whichever is less. Every dollar contributed (both employee and employer) counts toward this limit, including after-tax contributions.

Finally, there are special non-discrimination rules to prevent highly compensated employees (HCE) from being able to save substantially more than lower paid employees. If you earned $85,000 or more in 2000, or owned 5 percent or more of the company, additional contribution caps may apply for you in 2001, because the HCE designation is based on your previous year's salary. For 2001, the income limit for highly compensated employees is $85,000. What does this mean? If you earn $85,000 or more in 2001, your contributions to a 401(k) plan could be limited in 2002.