Which maximum contribution limit is applied to annual additions?

The maximum contribution limit applied to annual additions in a 401(k) plan is determined by either a statutory dollar amount or a percentage of the participant's compensation. Currently, the IRS sets a statutory limit for defined contribution plans, which must be applied to annual additions, including employee contributions, employer contributions, and any forfeitures that are credited to the account.

The correct answer reflects the understanding that contributions to a 401(k) plan cannot exceed the lesser of the statutory limit, which adjusts annually based on inflation, or 100% of an employee's compensation for that year. This ensures that while there is a cap on contributions to prevent disproportionately high contributions relative to salary, the overall contribution is still tied to the compensation of the participant.

So, the choice clarifies that the amount that can be contributed cannot exceed 100% of a member's salary, providing a practical limitation necessary for compliance with federal regulations governing retirement plan contributions.