When it comes to 401k contribution limits, the good news is really just an absence of bad news.

As recently as September, 2009, people were predicting a decrease in maximum allowable contributions.  That’s because of the formula the government uses to set limits and the way it’s tied to inflation.  Mark Miller explained the calculation and why it seemed like we were headed for lower limits:

The issue here is the low inflation rates we’ve been experiencing as a result of the recession. By law, the Internal Revenue Service sets the 401(k) annual maximum contribution using a formula tied to inflation rates in the third quarter of each year, with adjustments up or down in $500 increments. The ceiling has been rising steadily in recent years; for 2009, it’s $16,500–up from $15,000 as recently as 2006. Workers over age 50 can kick in an additional $5,000 in catch-up contributions.

The IRS will compare third quarter inflation to the same period a year ago–a time when consumer prices temporarily spiked just before the economy crashed. So, the formula almost certainly will indicate a lower contribution ceiling for 2010–probably $16,000 and $5,000 for catch-ups.

Well, “almost certainly” isn’t the same as “certainly.”  We managed to dodge the reduction bullet because the government decided it was more important to allow more in contributions than it was to follow their own formula.  Michael Rubin notes the government’s motivation for keeping the 2009 401k contribution limits in place:

Although the formula which determines how much the 401k contribution changes each year would have led to a $500 decrease in the permissible 401k savings level, the IRS has decided to permit the limit to remain unchanged. Largely to help companies and service providers from various software modifications, the limits will be the same as 2009′s limit.

So, that leaves us right where we were a year ago, with annual 401k contribution limits set at $16,500 for individual employees.  If you’re over 50 and trying to make up for those years where you didn’t sock enough away, the catch-up contribution limit will stay put at $5,500. 401kPlanning.org notes some of the other deferral and threshold limits.

Those who realize the value of making a maximum contribution to a 401k might have originally hoped for an increase in the contribution limits, but the state of inflation rendered that idea complete non-starter.  Hey, it could’ve been worse.  Uncle Sam could’ve followed his own rules, which would have resulted in a decreased limit.

While we’re on the subject of these limits, it’s worth making a pitch for 401k participation.  You might think that these limits would have a widespread effect–in reality, though, they don’t matter to most people.  That’s because experts estimate that less than 10% of eligible people actually butt up against their 401k contribution limits.  In other words, the limits are important to those who really recognize the value of utilizing their retirement accounts, but it has very little impact on the population as a whole.

401kMaximum.org explains why that’s unfortunate:

Why contribute when you have to lock up your money for so long? Just the idea that you are contributing with pre-tax dollars is a huge benefit. In addition, all the investment income earned inside a 401K is tax deferred which means that you don’t have to pay taxes on the money until it is withdrawn. That is another huge benefit.

Between those two it is hard for any other investment to compare- unless of course, you were willing to take a lot of risk to make up for all the tax advantages you would lose with an investment in a 401K plan. When you make contributions to your 401K it is like the government is helping you pay for a part of your retirement plan.

So, while it would be nice for a sliver of the population to encounter higher 401k contribution limits, there are still way too many people out there who need to increase their involvement.