Contribution limits are essentially set limits that determine how much of your income you can place into your 401K on an annual basis. The federal government determines the maximum contribution that your employer can allow you to contribute, however, many employers have their own limits as well, most of which are generally less than the federal limit for the majority of employees.
The current contribution limits as determined by the federal government are as follows:
2006 : $15,000
2007 : $15,500
2008 : $16,000
Catch up 401K (50 or older): $5000
These limits essentially establish the limit to which you can add to your 401K on an annual basis. This is generally change annually, and are determined by the federal government usually a few years ahead of time. Once these are determined, employers have to determine their own limits. Generally, employers allow only a percentage of your salary, with a maximum amount allowed being the federal limit. So, lets assume that your employer had a limit of 10%, which is pretty standard, and you were to make $75,000 per year, then you could contribute $7,500 per year. This is below the federal limit, so this is allowed. If you wanted to contribute more, you wouldn’t be able to through your employer because of their 10% limit. If you had multiple employers with 401K plans however, you could contribute up to the federal amount from them as well, but keep in mind, you have already contributed $7,500, so you would only be allowed $7,500 more in 2006, $8,000 more in 2007, and $8,500 more in 2008.