Explore commonly used personal finance terms.
The annual compensation limit is the maximum amount of an employee’s salary that can be factored into retirement plan contributions, set by tax authorities. This limit applies to qualified retirement plans like 401(k)s and aims to cap the tax-advantaged benefits for high earners. Employers base contributions on eligible compensation up to this limit, ensuring equitable retirement benefits across income levels. The limit adjusts periodically with inflation and helps balance tax incentives with retirement savings objectives.
