TaxSmart Trivia Question for 12/9/2025:

Q: Which of the following best describes the original 401(k) employee contribution limit when plans began in 1981?

A. $23,500 like today
B. $7,000
C. $0 — Congress forgot to set one
D. Whatever your employer felt like that day

The history of 401(k) plans is interesting. When they were first implemented, the total contribution limit was $45,475, or 25% of compensation (whichever is less). The funny number of $45,475 came from a limit of $25,000 defined by the ERISA legislation in 1974 (inflation was high in the 1970’s, too). Nowadays, the limits are rounded to the nearest $500.

However, Congress did not specify any separate limit for employee deferrals. The contribution limit was the combined amount allowed for contributions made by employee and employer. It didn’t matter how much came from either source.

The 401(k) as we know it, with separately defined limits for employee contributions, employer contributions, and overall combined contribution limits until 1987. The original employee limit was $7,000 which is the same as the limit for IRA contributions today (2025).