Tennessee Insurance Practice Exam

What is the maximum percentage of salary that can typically be contributed to a 401(k) plan?

1. 10%

2. 15%

3. 20%

4. 25%

The correct answer is: 20%

In a 401(k) plan, the maximum percentage of an employee's salary that can be contributed is typically determined by IRS regulations. For 2023, the contribution limit for employees is set at $22,500, with an additional catch-up contribution for those aged 50 and older. However, the maximum allowable contribution percentage can vary based on the plan specifics and the overall contribution limits. The option indicating 20% is often seen as a practical limit in many individual cases, as employers may set their own match limits or contribution rules that do not exceed this percentage. Therefore, while 25% may sound plausible, it's generally not aligned with standard practice since many employers limit contributions to balance the overall benefits and ensure compliance with the contribution limits set forth by the IRS. The maximum contribution level in practice tends to hover around 20%, making it a common understanding among employees and employers alike. This understanding emphasizes the relationship between annual limits and percentage contributions while aligning with the broader retirement savings goals set by the IRS.