What defines the "Annual Contribution Limitation" for a 401(k) plan?

The term "Annual Contribution Limitation" for a 401(k) plan specifically refers to the total contributions permissible in a calendar year. This limitation encompasses all types of contributions made to an individual's 401(k) account, including employee elective deferrals, employer matching contributions, and any other employer contributions. The IRS sets these limits each year to ensure that contributions do not exceed a specified amount, which helps maintain the tax-advantaged status of the 401(k) plans.

Understanding this definition is crucial because it affects how individuals save for retirement and how employers structure their contributions. The annual contribution limitation is designed to encourage savings while preventing excessively large contributions that could distort the tax benefits associated with these retirement accounts. For example, while employees may wish to contribute as much as possible to maximize their retirement savings, the annual limit ensures that contributions remain within an acceptable range set by regulatory authorities.

In contrast, the other options do not accurately capture the essence of the "Annual Contribution Limitation." For instance, the minimum amount that must be contributed annually does not exist for 401(k) plans; individuals may choose to contribute nothing in a given year. Likewise, a cap on employer contributions only would not reflect the total allowable contributions from both employers and employees.