My wife works at one of the grocery supermarket chains in California. She was recently told that her 401k contributions cannot exceed $10,000 per year due to some labor-union agreement / equality of opportunities for everyone (such that those employees who earn more wouldn't get more benefits from 401k plan than those who earn less).

How is it even legal? Does my wife have an option to override this limitation and contribute pre-tax money to her 401k plan up to a federal limit ($19,500 in 2021)?


2 Answers 2


As discussed in this investopedia article contributions may be limited for Highly Compensated Employees (HCE). This article discusses the Actual Deferral & Actual Contribution Percentage Tests (ADP/ACP) which are used to determine limits for HCEs.

However, in a unionized company, there can be other considerations . Union Bargaining agreements can override the plan terms, and cause a reduction in the contribution limits. The article "Challenges of Retirement Plans with Union Members" says:

Retirement plans at organizations where the workforce is largely unionized have the unique challenge of being obligated to negotiate plan terms with the union. It’s a process that can be very burdensome, experts say, but also very rewarding.

When a retirement plan is run at an organization with a union, the collective bargaining agreements trump the retirement plan document, as specified by the National Labor Relations Act, according to David Kern, partner with the labor and employment practice and chair of the National Labor Relations Act team at Quarles and Brady LLP, in Milwaukee. “Any changes to the plan need to be bargained with the union,” Kern says.

Retirement plans at non-union organizations typically have a provision that the employer has the right to modify the plan at any time, says Amy Ciepluch, chair of the employee benefits and executive compensation team at Quarles & Brady. At a union shop, however, “that type of language would not trump what a collective bargaining agreement guarantees. The collective bargaining agreement would govern.”

However, the federal limit on total retirement contributions is unchanged. So an employee limited in 401K contributions can increase contributions to an IRA or other retirement account.

  • Even if you're over the IRS's limit, you can always buy and hold index funds, bonds, or other financial securities with post-tax money, and treat those investments as a supplementary retirement fund. It's taxable, so obviously you should exhaust your tax-sheltered options first, but there is never a hard upper bound on the total amount of money you can save for retirement.
    – Kevin
    Aug 18, 2021 at 6:22
  • 1
    @kevin well you can't save more than your income, but otherwise true. But my point was that much of the special benefit of a 401k contribution can still be obtained. Aug 18, 2021 at 6:26
  • Deplorable. Allowing unions to limit retirement contributions is I think the worst idea I've ever heard. Aug 18, 2021 at 13:56
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    @RobertHarvey The government already limits retirement contributions, and highly-compensated employees are further limited so that the plan can't be designed to favor management over rank and file. Collective bargaining simply builds on that.
    – Barmar
    Aug 18, 2021 at 14:49
  • @Robert Harvey In any case, this site is for questions and answers about what the law is, not about what it ought to be. Aug 18, 2021 at 14:50

There are 401k rules to prevent all the benefits going to the top people. That’s one of the reasons management provides broad incentives to participate.

From IRS web site

The top-heavy rules generally ensure that the lower paid employees receive a minimum benefit if the plan is top-heavy. A plan is top-heavy when, as of the last day of the prior plan year, the total value of the plan accounts of key employees is more than 60% of the total value of the plan assets.

  • From what I found, it is a matter of whether you are HCE or not. Per IRS, HCE: 1) Owned more than 5% of the interest in the business at any time during the testing year or the preceding year (including certain family members via attribution rules), regardless of how much compensation that person earned or received, OR 2) Received compensation from the business of more than $125,000, during the preceding year ($130,000 for 2020) AND, if the employer so chooses, was in the top 20% of employees when ranked by compensation. – If someone doesn’t meet either of those conditions, they are an NHCE.
    – wintermute
    Aug 17, 2021 at 21:34
  • So, it is my understanding, anyone who does not have a 5% (or more) stake in the company is automatically considered a non-highly compensated employee.
    – wintermute
    Aug 17, 2021 at 21:39
  • Could she be in the top 20%? Aug 17, 2021 at 21:43
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    @wintermute Any one of those conditions can make one an HCE. And if plan fails the ADP/ACP test. that can also place limits on contribution. But union bargain can separately impose limits. See my answer. Aug 17, 2021 at 21:48
  • Thank you for your clarification, @DavidSiegel !
    – wintermute
    Aug 17, 2021 at 21:53

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