Why is the total 401(k) contribution limit (employee + employer) so high?
The 2014 employee contribution limit is ,500.
The 2014 total contribution limit is ,000.
(Provided they're not capped earlier based on low income.)
Meaning the IRS has left room for a ~,000 employer contribution, a 2:1 match with no limit.
This seems a bit excessive. I was able to find a survey which said the average company contribution in the top 30 plans was over ,000, so apparently there are companies, and their employees, who are contributing to the max, but I think the average company match is much lower.
Why is the gap between employee and total limit so high?
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Some 401k plans allow you to make "supplemental post-tax contributions". basically, once you hit the pre-tax contribution limit (17.5k$ in 2014), you are then allowed to contribute funds on a post-tax basis. Because of this timing, they are sometimes called "spillover" contributions. Usually, this option is advertised as a way of continuing to get company match even if you accidentally hit the pre-tax limit.
But if you actually pay attention to your finances, it is instead a handy way to put away additional tax-advantaged money. That said, you would only want to use this option if you already maxed out your pre-tax and Roth options since you don't get the traditional tax break on contributions or the Roth tax break on the earnings. However, when you leave the company, you can transfer the post-tax money directly into a Roth IRA when you transfer the pre-tax money, match, and earnings into a traditional IRA.
Because 401k's are also used by self employed. A person who has a schedule C profitable income can open a 401k and "match" in whatever ratio he wants, up to 25% of the net profits or the limits you stated. This allows self-employed to defer more income taxes to the future.
Why only self-employed? Good question. Ask your congressman. My explanation would be that since they're self-employed they're in much more danger of not having income, especially later in life, if their business go south. Thus they need a bigger cushion than an average W2 employee who can just find another job.
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