IRC 401(a)(17) Annual Compensation Limit: Contributions and Pensions

For 2026, the IRC Section 401(a)(17) annual compensation limit is $360,000, up from $350,000 in 2025.¹ That figure is the maximum amount of any one employee’s pay that a qualified retirement plan is allowed to plug into its contribution or benefit formulas. Compensation above the cap exists for payroll purposes but is invisible to the plan.

The IRS resets this number each year using cost-of-living procedures tied to wage growth, rounding down to the nearest $5,000.² Every 401(k), profit-sharing plan, and traditional pension has to respect it, or the plan’s qualified status is at risk.

How the Cap Affects Employer Contributions

In a defined contribution plan, such as a 401(k) or profit-sharing plan, the compensation cap directly shrinks employer contributions for high earners. When the plan runs its allocation formula, it must substitute $360,000 for any actual pay above that amount.³

Take a profit-sharing plan that allocates 5% of each participant’s compensation. An employee earning $500,000 might expect a $25,000 allocation. The plan has to cap compensation at $360,000, so the maximum allocation is $18,000. The extra $140,000 of pay simply doesn’t count.

The same limit governs employer matching. A plan that matches 50% of deferrals on the first 6% of pay can match at most $10,800 for anyone (50% × 6% × $360,000), no matter how much the employee actually earns or defers.

Does the Cap Limit What You Can Defer From Your Paycheck?

Usually no. A common misconception is that hitting $360,000 in pay shuts off your 401(k) deferrals. Employee elective deferrals are governed by their own ceiling under Section 402(g), which is $24,500 for 2026, and that limit applies independently of the compensation cap.⁴ An employee whose pay exceeds $360,000 can still defer up to the full $24,500.

There is an exception worth checking. Some plan documents specifically provide that deferrals must stop once year-to-date compensation reaches the 401(a)(17) limit.⁵ Under that design, an employee earning $30,000 a month would stop deferring in December even if they hadn’t yet reached $24,500. This is uncommon, but it does happen, so read your summary plan description if your pay is high enough for it to matter.

How the Cap Works in Pensions

Defined benefit plans apply the cap to the pay that goes into the benefit formula. If a pension promises 1.5% of final average pay per year of service, the compensation figure used for each year in that average cannot exceed the 401(a)(17) limit in effect for that year.³ A three-year final-average calculation uses three separate caps if the limit changed across those years.

Pensions face a second, separate ceiling. Even once the benefit formula produces a result using capped compensation, the actual annual pension paid out cannot exceed the Section 415(b) limit. For 2026 that ceiling is $290,000 per year.¹ So high earners in a pension plan run into two constraints: the cap on pay going into the formula, and the cap on the benefit coming out.

How the Cap Applies to Self-Employed Savers

If you contribute to a solo 401(k) or SEP-IRA, the same $360,000 ceiling applies, but your “compensation” is not gross revenue. Self-employed compensation is net earnings from self-employment, reduced by the deductible portion of self-employment tax and by the plan contribution itself.⁶ Because the contribution reduces the compensation base that determines the contribution, the calculation is circular, and the IRS provides rate tables and worksheets to work through it.

The cap applies to that adjusted earned-income figure. A sole proprietor with $600,000 of net self-employment income still has their plan compensation capped at $360,000.

Grandfathered Governmental Plans

A higher limit applies to a narrow group of governmental plan participants. If the plan was in effect on July 1, 1993, and permitted cost-of-living adjustments to the compensation cap, eligible participants may use a grandfathered limit. For 2026 that grandfathered figure is $535,000, up from $520,000 in 2025.¹ This does not apply to private-sector plans.

Short Plan Years

When a plan year is shorter than 12 months, usually because an employer is switching its plan year-end or starting a plan mid-year, the compensation limit must be prorated. Multiply $360,000 by the number of months in the short plan year and divide by 12.⁷ A six-month plan year uses $180,000.

Proration is required only when the plan actually measures compensation over the shortened period. If the plan defines compensation using a full 12-month period, such as the calendar year, no proration is needed even though the plan year is short.⁷ Individual employees who join or leave mid-year in a plan that runs a full 12-month cycle are also not prorated.

What High Earners Can Do About It

The compensation cap is doing exactly what Congress designed it to do: limit how much tax-deferred wealth can accumulate inside qualified plans for top earners. An executive earning $750,000 gets the same qualified-plan contribution as a colleague earning $360,000 if the formula is a flat percentage. Over a 25-year career, that gap compounds into a real shortfall relative to an uncapped formula.

This is why employers that compete for senior talent often layer a nonqualified deferred compensation plan on top of the 401(k) or pension. These arrangements, typically structured under IRC Section 409A, or under Section 457(b) for governmental and tax-exempt employers, let executives defer pay beyond what qualified plans permit. The tradeoff is that nonqualified plan assets generally remain subject to the employer’s creditors and don’t get the trust protection that qualified plan assets receive. The 401(a)(17) cap is a ceiling on what the qualified plan can promise, not a ceiling on your overall retirement planning.

1
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Cost-of-Living
2
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
3
eCFR. 26 CFR 1.401(a)(17)-1 – Limitation on Annual Compensation
4
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
5
Internal Revenue Service. Deferrals and Matching When Compensation Exceeds the Annual Limit
6
Internal Revenue Service. Self-Employed Individuals – Calculating Your Own Retirement Plan Contribution and Deduction
7
Internal Revenue Service. Issue Snapshot – Treatment of 401(a)(17) Limitation in Defined Contribution Plan in a Short Plan Year