Employer Limit Increased

[mpbaker22]

So, I received notice this morning that my employer 401K limit is increasing.  The limit has been 25% but it's going up to 30% on Jan 1.

Quote from my employer (with references to employer's name removed):

Changes are coming to Employer's plan, effective Jan. 1, that will allow employees to set aside more of their income for retirement.

Save up to 30 percent of base pay

Eligible employer's participants, including nonunion employees and employees represented by a union that accepted this change, may contribute 5 percent more (up to 30 percent) of their base pay on a pretax or aftertax basis, or a combination of both that cannot exceed 30 percent.

I also learned that at least 2 other people on my team, out of 17, have been contributing 25%.  It's like the opposite of the overheard at work thread.

[Mississippi Mudstache]

Interesting. I can contribute up to 75% of my paycheck to my 401(k). I'm glad, too, because I shifted my contribution to the max for the last 2 months of the year after having it set on 12% for most of the first 8 months. I'll come in about $1000 shy of maxing it out.

Also interesting was a recent blurb from Vanguard (the custodian of our 401(k)s) that mentioned 10% of people maxed them out each year. I was actually pretty surprised. I would have guessed that the number would have been lower. It seems that the most common contribution amount among my co-workers - at least the ones who talk about it - is 6%, or just enough to get the full match.

[2527]

10%...that's a lot more than I would have thought. 

[Rural]

I've never understood the reasoning for a limit on contributions like that. The IRS already has a limit in place, and I see what's in it for them, but what's in it for employers?

[TexasSaver]

First post!  I believe some may need to be careful with their percentage.  Unless you are over 50 the 401K IRS limit is $17,500 ($23,000 if 50 and older).  I believe your employer only matches contributions.  So if you hit your limit halfway through the year you will have missed out on potential matching funds from your employer.  I think the key is to set your percentage to where you hit the $17, 500 mark with your last paycheck.  Someone can correct me if I am wrong.

[mpbaker22]

10%...that's a lot more than I would have thought.

Yea, but apparently 3 people on my team do it, and there are others who I haven't talked to about it. 

First post!  I believe some may need to be careful with their percentage.  Unless you are over 50 the 401K IRS limit is $17,500 ($23,000 if 50 and older).  I believe your employer only matches contributions.  So if you hit your limit halfway through the year you will have missed out on potential matching funds from your employer.  I think the key is to set your percentage to where you hit the $17, 500 mark with your last paycheck.  Someone can correct me if I am wrong.

This is true, and has been mentioned before.  There was another thread similar, and I looked for it quite a while, but I couldn't find it.  I make in the neighborhood of 50K, so 25% puts me at 12.5K and 30% puts me at 15K.  Some people a bit higher than me could run into that problem though.

[Hamster]

First post!  I believe some may need to be careful with their percentage.  Unless you are over 50 the 401K IRS limit is $17,500 ($23,000 if 50 and older).  I believe your employer only matches contributions.  So if you hit your limit halfway through the year you will have missed out on potential matching funds from your employer.  I think the key is to set your percentage to where you hit the $17, 500 mark with your last paycheck.  Someone can correct me if I am wrong.

THIS!

I had a few unexpectedly large paychecks, so I maxed out my 401k my last paycheck of November, meaning I lose out on 2 paychecks worth of employer match. It's usually in your best interest to contribute every single pay period rather than maxing out your employee contribution before the end of the year.

[ender]

Some employers also will match even if you aren't contributing - if I put 50% in (which is what my company lets me) but keep my contribution set at 50% my company match works the same as if I was actively contributing, but that is also because they will prevent me from over contributing. I could set it at 50% and leave it there year round, in other words.

YMMV everywhere.

[Mississippi Mudstache]

My employer does not include bonuses in the contributions, so when I get my raise in March, I can calculate the exact percentage to max out on the last pay period.

[fmzip]

Why cut it so close to meet the max on your last paycheck unless you are a salary employee?

Be a mustachian and max it out sooner, then use those last few checks as a bonus to stick in a Roth IRA ;)


My wife used a have 12% limit. Fortunately she works for a small office. I had her ask her employer to up it to 75% which they did. This allows us to hit $22,500 next year (she turns 50)

[mpbaker22]

Why cut it so close to meet the max on your last paycheck unless you are a salary employee?

Be a mustachian and max it out sooner, then use those last few checks as a bonus to stick in a Roth IRA ;)


My wife used a have 12% limit. Fortunately she works for a small office. I had her ask her employer to up it to 75% which they did. This allows us to hit $22,500 next year (she turns 50)

How do you know that's not already happening with the other poster?  At 25%, I can still max out a Roth IRA by May or June.  At 30% it might take me a bit longer.  I haven't seen what exactly that means for my take-home.

[fmzip]

^^^^

simply saying, calculating to reach $17,500/26 or 52 weeks has a possibility of not meeting your max.

Interesting. I can contribute up to 75% of my paycheck to my 401(k). I'm glad, too, because I shifted my contribution to the max for the last 2 months of the year after having it set on 12% for most of the first 8 months. I'll come in about $1000 shy of maxing it out.

Also interesting was a recent blurb from Vanguard (the custodian of our 401(k)s) that mentioned 10% of people maxed them out each year. I was actually pretty surprised. I would have guessed that the number would have been lower. It seems that the most common contribution amount among my co-workers - at least the ones who talk about it - is 6%, or just enough to get the full match.

[TexasSaver]

The reason I calculate to reach $17,500 at the end of the year is to maximize my employers match.  My company matches my contributions dollar for dollar on the first 3 percent. They match 50 cents on the dollar for the next 3 percent.  That is 4.5 percent free money.  If I hit the $17,500 mark early I miss out on the free money since they only match if I am contributing, and once you hit the limit they stop pulling money from your paycheck. 

[Mississippi Mudstache]

What TexasSaver said exactly. I only get my company match for pay periods in which I contribute. Maxing out early would mean missing out on free money. I also max out 2 IRAs and an HSA. It's not as if my 401(k) is my only tax advantaged option.

[lr]

Plans vary, but I believe the $17500 IRS limit is for money from your salary, not including the employer match. So in theory, you can drop $17500 into the account from your (big!) January paycheck and your employer can still drop in their full match without breaking IRS rules, later in December.  I'd be mad if my boss ate my match just because I saved faster than other people.

http://taxes.about.com/od/retirementtaxes/qt/401k-contribution-limits.htm

[Mississippi Mudstache]

You could be as mad as you like, but it still wouldn't get you the employer match. Why is there a need to criticize those who have chosen to optimize their savings under the rules of the plans that are available to them?

[AccidentalMiser]

Plans vary, but I believe the $17500 IRS limit is for money from your salary, not including the employer match. So in theory, you can drop $17500 into the account from your (big!) January paycheck and your employer can still drop in their full match without breaking IRS rules, later in December.  I'd be mad if my boss ate my match just because I saved faster than other people.

Point 1.  The limit is only your contributions.  Employer match doesn't count against your 17.5/22.5 limit.

Point 2. Employers can give you a full match even if you save your limit more quickly.  However, most don't.  PLEASE, Check with your benefits folks before accelerating your contributions.  My first (civilian) employer would give you full match if you hit the limit early.  My current one doesn't (ask me how I found this out!)

[lr]

My criticism isn't of you guys, but of the employers that make your lives harder. I wonder what the reasoning is for this ongoing match rule. Are they counting on you suddenly quitting without taking a full match with you? Or is it easier to kill the match if the year goes badly? Does it simplify accounting?

[kkbmustang]

First post!  I believe some may need to be careful with their percentage.  Unless you are over 50 the 401K IRS limit is $17,500 ($23,000 if 50 and older).  I believe your employer only matches contributions.  So if you hit your limit halfway through the year you will have missed out on potential matching funds from your employer.  I think the key is to set your percentage to where you hit the $17, 500 mark with your last paycheck.  Someone can correct me if I am wrong.

THIS!

I had a few unexpectedly large paychecks, so I maxed out my 401k my last paycheck of November, meaning I lose out on 2 paychecks worth of employer match. It's usually in your best interest to contribute every single pay period rather than maxing out your employee contribution before the end of the year.

This totally depends on what the employer's plan says. Not all matches are allocated on a pay period basis. FYI.

[kkbmustang]

My criticism isn't of you guys, but of the employers that make your lives harder. I wonder what the reasoning is for this ongoing match rule. Are they counting on you suddenly quitting without taking a full match with you? Or is it easier to kill the match if the year goes badly? Does it simplify accounting?

There are several reasons, from an employer perspective, to making the match allocated based on pay periods:
1. If the match is allocated each pay period, they do the same calculation each pay period and can code their payroll system accordingly.
2. If employees leave, they generally don't owe them any additional matching contributions (i.e., versus via a true up in 3 below).
3. If they don't do it based on pay periods, they may be required to do an end of year true up matching contribution calculation and allocation. This would require an additional calculation for each employee, perhaps cause additional payroll reporting issues, etc.
4. IIRC, they do not have the option to decide to eliminate the match before December 31st without violating the anti-cutback rules (IRC 411(d)(6)).
5. They want to ensure that employees contribute throughout the year.
6. If employees front load contributions, the employer would be on the hook for a lesser amount of matching contributions.

[money_bunny]

Accidental Miser you wrote: "Point 1.  The limit is only your contributions.  Employer match doesn't count against your 17.5/22.5 limit."

Is there a reference for this? This is the first time I have heard of this.

I get up to 4% matched but it's a 3 year all or nothing vesting schedule. If I leave before that I lose the 4 percent. I'm new to FIRE so 2014 is the first time I am going to get close to the match.

[chicagomeg]

Depending on how good your current match is, another reason to spread out your contributions is that if you change jobs in the year and new employer has a better match, you can't take advantage of that if you've already hit annual max.

Personally, I just find it easier to have it be consistent across the year so I know how much I will be able to save each month etc. Whatever works. As long as you're maxing it out I think you're doing enough to escape criticism.

[kkbmustang]

Accidental Miser you wrote: "Point 1.  The limit is only your contributions.  Employer match doesn't count against your 17.5/22.5 limit."

Is there a reference for this? This is the first time I have heard of this.

I get up to 4% matched but it's a 3 year all or nothing vesting schedule. If I leave before that I lose the 4 percent. I'm new to FIRE so 2014 is the first time I am going to get close to the match.

The $17.5k limit is in IRC 402(g). The part that you're looking for about match not counting towards that is in IRC 415.

See here:http://www.irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401(k)-plans-in-2014

[AccidentalMiser]

Accidental Miser you wrote: "Point 1.  The limit is only your contributions.  Employer match doesn't count against your 17.5/22.5 limit."

Is there a reference for this? This is the first time I have heard of this.

I get up to 4% matched but it's a 3 year all or nothing vesting schedule. If I leave before that I lose the 4 percent. I'm new to FIRE so 2014 is the first time I am going to get close to the match.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---401(k)-and-Profit-Sharing-Plan-Contribution-Limits

There is a total deferral (yours plus employer's) limit, but it's WAY above 17.5k.  (Also, the 22.5 limit is actually 23 for those turning 50+, my apologies)

[AccidentalMiser]

Accidental Miser you wrote: "Point 1.  The limit is only your contributions.  Employer match doesn't count against your 17.5/22.5 limit."

Is there a reference for this? This is the first time I have heard of this.

I get up to 4% matched but it's a 3 year all or nothing vesting schedule. If I leave before that I lose the 4 percent. I'm new to FIRE so 2014 is the first time I am going to get close to the match.

The $17.5k limit is in IRC 402(g). The part that you're looking for about match not counting towards that is in IRC 415.

See here:http://www.irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401(k)-plans-in-2014

Thanks, Mustang!

[kkbmustang]

Accidental Miser you wrote: "Point 1.  The limit is only your contributions.  Employer match doesn't count against your 17.5/22.5 limit."

Is there a reference for this? This is the first time I have heard of this.

I get up to 4% matched but it's a 3 year all or nothing vesting schedule. If I leave before that I lose the 4 percent. I'm new to FIRE so 2014 is the first time I am going to get close to the match.

The $17.5k limit is in IRC 402(g). The part that you're looking for about match not counting towards that is in IRC 415.

See here:http://www.irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401(k)-plans-in-2014

Thanks, Mustang!

No problem. The $52k total limit includes all contributions, whether employee or employer. The $17.5k is employee deferrals, plus the $5.5k for catch-up contributions. All of these dollar limits are, of course, adjusted for inflation.

Let me know if you need help finding anything in the Code. I might know it off the top of my head - I'm a bit of a Code Head (occupational hazard).

[fmzip]

The reason I calculate to reach $17,500 at the end of the year is to maximize my employers match.  My company matches my contributions dollar for dollar on the first 3 percent. They match 50 cents on the dollar for the next 3 percent.  That is 4.5 percent free money.  If I hit the $17,500 mark early I miss out on the free money since they only match if I am contributing, and once you hit the limit they stop pulling money from your paycheck.

Let's say you make 100,000 per year. They match dollar for dollar on the first 3%. That's $3000 you contribute, $3000 they contribute.

Then they match 50 cent on the next 3%. You put in $3000, they put in $1500.

You've put in $6,000, you are still able to put in $11,500 more. They hit their cap of $4500. So it doesn't matter when you hit $17,500, you will always get your full company match.  The $17,500 is YOUR max, not including theirs.

http://www.bankrate.com/finance/retirement/employer-match-counts-toward-401k-limit.aspx

The limiting factor is typically if an employer caps what you can have taken out of each check. If there is no limit on what you can withhold, you can max sooner. I have my wife's set at 75% deduction per check and they have a 4% match of her salary. She doesn't make a lot so in November, we ultimately see a full take home paycheck finally :)


And also understand, once the limits on either your 401K deductions or the companies percentage match is reached, the payroll deduction will automatically stop. There is no way you can go over unless you work for a mom and pop shop that does their accounting on napkins :)

Isn't the percentage match based on your total annual salary? So if you are only contributing 4.5% of your salary, they will match 4.5% of your salary. So if you make $52K, the most they will match is $2340 regardless. Are some of you saying if you had a payroll deduction of 100% of your first 10 paychecks of the year, they wouldn't match the 4.5% of your salary?? That is the point, if you did in fact do 10 straight checks of $52K annually, you would be at 10,000 contributed to your 401K and they would have already hit their 4.5% match of $2340 at week 3. This is still a long way before you ever hit your max of $17,500.

I find it difficult to believe this isn't the case. Reason being, if a CEO made $400K per year and the company match was 4.5%, the CEO would hit the limit on his 3rd or 4th check with a 10-15% payroll deduction and the company would have already hit the matched limit @ $18,000 (4.5% of $400,000).

[chasesfish]

First post!  I believe some may need to be careful with their percentage.  Unless you are over 50 the 401K IRS limit is $17,500 ($23,000 if 50 and older).  I believe your employer only matches contributions.  So if you hit your limit halfway through the year you will have missed out on potential matching funds from your employer.  I think the key is to set your percentage to where you hit the $17, 500 mark with your last paycheck.  Someone can correct me if I am wrong.

This isn't accurate with all employes.  I've sometimes been maxed out on my contribution mid year (bonus is paid in March) and my employer continues to contribute their match.

[TexasSaver]

All companies may not work the same, but for mine they only match if I am contributing.  That means they only match for a paycheck that I have 401k dollars removed from.  Below are a few examples.

For someone making 100k a year that is about $3846 per pay period (every 2 weeks).  If they elect a 17% contribution that is $654 dollars that are removed per paycheck.  The company match of 4.5% on $3846 each pay check is $173 (3846x0.045). This is the most free money that can be had per check as long as the total 401k contribution percentage is 6% or more  With a 17% contribution at the end of the year $17,004 (654x26) would have been put in by the employee and the company would have put in $4498 (173x26).  The total put in would be $21,502.

Now lets look if that same person doubled their percentage to 34%.  They would contribute about $1308 per paycheck and their company would contribute $173 (3846x0.045). By their 14th paycheck they would have it their maximum $17500.  They would no longer be putting money from their check into the 401k, so a company like mine would have stopped their matching.  The company would have contributed 14 pay checks of $173 for a total of $2422.  They would have missed out on $2076 (4498-2422) company money.

Not all companies may work the same so everyone should find out for themselves how their company match works.

[fmzip]

^^^^ah, I see.....

Best to spread it out in this scenario

[dude]

Yep, this is how it works for Fed employees.  Max out too early, and you lose.

[okashira]

I plan to target ~$16,000 or so because raise comes mid year.

I can contribute 100% (that would be an interesting paycheck) to catch up on last paycheck if needed.

[kkbmustang]

I find it difficult to believe this isn't the case. Reason being, if a CEO made $400K per year and the company match was 4.5%, the CEO would hit the limit on his 3rd or 4th check with a 10-15% payroll deduction and the company would have already hit the matched limit @ $18,000 (4.5% of $400,000).

Try telling your General Counsel this exact same thing. Not a very pleasant conversation. Especially when GC got a bonus in February and hit the $17,500 limit in March. Got screwed out of the rest of his match. There were other technical issues involved, but this CAN happen depending on how the plan is written.

It's best to know exactly what the plan says and make deferrals accordingly.

[step_away]

There are several reasons, from an employer perspective, to making the match allocated based on pay periods:
1. If the match is allocated each pay period, they do the same calculation each pay period and can code their payroll system accordingly...

I've encountered this myself. I used to receive a match for my bonus eventhough I didn't contribute since I maxed out my contribution through my regular pay.  After a subseqent payroll processor change, I didn't get my bonus match because I didn't contribute.  I had to contact HR to get my bonus match citing our 401K plan which indicated I would get the full 3% salary and bonus match as long as I contribute 3% total. However, people that didn't reach out lose the matching contribution.  Since then, I make sure that I stretch my contribution to cover at least 3% of my bonus as well regular pay.

[kkbmustang]

There are several reasons, from an employer perspective, to making the match allocated based on pay periods:
1. If the match is allocated each pay period, they do the same calculation each pay period and can code their payroll system accordingly...

I've encountered this myself. I used to receive a match for my bonus eventhough I didn't contribute since I maxed out my contribution through my regular pay.  After a subseqent payroll processor change, I didn't get my bonus match because I didn't contribute.  I had to contact HR to get my bonus match citing our 401K plan which indicated I would get the full 3% salary and bonus match as long as I contribute 3% total. However, people that didn't reach out lose the matching contribution.  Since then, I make sure that I stretch my contribution to cover at least 3% of my bonus as well regular pay.

If the employer is smart, once they identified your error they should have done an audit to make sure it didn't happen to others. That's an operational failure right there and could disqualify the plan.

[step_away]

If the employer is smart, once they identified your error they should have done an audit to make sure it didn't happen to others. That's an operational failure right there and could disqualify the plan.

There was a recent audit.  I heard other people subsequently receive some additional contribution.  However, I don't know whether it is for the bonus match because I also received some small additional fund when I thought I already received all my 401K match.

By the way, what would happen if the plan is disqualified?

[teen persuasion]

My criticism isn't of you guys, but of the employers that make your lives harder. I wonder what the reasoning is for this ongoing match rule. Are they counting on you suddenly quitting without taking a full match with you? Or is it easier to kill the match if the year goes badly? Does it simplify accounting?

There are several reasons, from an employer perspective, to making the match allocated based on pay periods:
1. If the match is allocated each pay period, they do the same calculation each pay period and can code their payroll system accordingly.
2. If employees leave, they generally don't owe them any additional matching contributions (i.e., versus via a true up in 3 below).
3. If they don't do it based on pay periods, they may be required to do an end of year true up matching contribution calculation and allocation. This would require an additional calculation for each employee, perhaps cause additional payroll reporting issues, etc.
4. IIRC, they do not have the option to decide to eliminate the match before December 31st without violating the anti-cutback rules (IRC 411(d)(6)).
5. They want to ensure that employees contribute throughout the year.
6. If employees front load contributions, the employer would be on the hook for a lesser amount of matching contributions.

I, or rather DH, just found another reason to spread your contributions thruout the year.  DH just got a notice from the CFO that he had contributed too much last year, and they wanted to reverse it.  We knew he'd contributed exactly $17k in 2012, and was on track to meet $17.5k this year.  It turns out that the plan followed a fiscal year from July 2012- June 2013 rather than a calendar year.  Since the fiscal year began in 2012, the annual limit was $17000, and he contributed slightly over that during the fiscal year.  He is a teacher, and there are 13 paychecks in the Jan - June period, but only 8 from Sep - Dec, so of course his contributions are skewed more heavily to the first half of the year.

DH also walked away from that talk w/ the impression that he was the only employee (out of over 500) that maxes!  Yikes!

[kkbmustang]

If the employer is smart, once they identified your error they should have done an audit to make sure it didn't happen to others. That's an operational failure right there and could disqualify the plan.

There was a recent audit.  I heard other people subsequently receive some additional contribution.  However, I don't know whether it is for the bonus match because I also received some small additional fund when I thought I already received all my 401K match.

By the way, what would happen if the plan is disqualified?

Worst case scenario, the plan loses its tax qualified status. All assets become immediately taxable, earnings are taxed at trust rates, employer loses deduction, etc. Now, the reality is, this rarely happens. The IRS doesn't want to disqualify plans. It will assess penalties on the employer (not on the plan) and will require the employer to fix the plan (i.e., put plan participants back in the situation they would have been in had the failure not occurred). It's really, really, really bad if the plan gets disqualified.

[eyePod]

You could be as mad as you like, but it still wouldn't get you the employer match. Why is there a need to criticize those who have chosen to optimize their savings under the rules of the plans that are available to them?

Plus it's dollar cost averaging too.