Author Topic: Help! - Is this 401k policy normal?  (Read 596 times)

MrFunnyMustache

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Help! - Is this 401k policy normal?
« on: December 11, 2020, 07:54:09 AM »
Hello fellow Mustachians, First-time poster here. I will keep this short and to the point. I work for a Fortune 500 company and recently discovered something frustrating about my 401k policy, which until now I have found to be nothing but great. The policy has a 5% match and allows for after-tax contributions which can be converted in-plan to Roth 401k. However, I just discovered that my company caps the after tax contributions at $23,250. After talking to payroll, this is how they came up with that number:

"We determine the After-Tax limit with the following formula $57000-$19500-$14250 (maximum potential match based on IRS Compensation of $285,000*5% =$14250) = $23250 After Tax Limit"

This obviously favors the highly compensated, and puts those of us who make nowhere near $285k/yr at a disadvantage. It seems silly to me, and not that difficult to calculate the after tax contribution limit based on an employees ACTUAL compensation. When I asked why this is in place, they explained:

"The Plan Committee reviews and approves the After Tax limit on an annual basis.  For administration purposes, the Committee has set a single after-tax contribution limit for all participants to minimize the risk of Plan IRS compliance issues."

Mustachians, is this normal for a Fortune 500 company to cap after tax contributions in such a manner that those of us who don't make anywhere near $285k/yr can never realize the full IRS 401k limit of $57000? If they can cap an employees after-tax contributions at $23250, why can't they cap their matching contributions such that the total employee+employer contribution (excluding employee pre-tax) of $57000-$19500=$37500 is not exceeded? Thanks!
« Last Edit: December 11, 2020, 08:13:46 AM by MrFunnyMustache »

achvfi

  • Bristles
  • ***
  • Posts: 305
  • Location: Midwest
Re: Help! - Is this 401k policy normal?
« Reply #1 on: December 11, 2020, 08:05:49 AM »
I think its normal. I am in Fortune 500 company as well, we have different compliance limits like this.

erutio

  • Pencil Stache
  • ****
  • Posts: 700
Re: Help! - Is this 401k policy normal?
« Reply #2 on: December 11, 2020, 08:24:07 AM »
So you can contribute $19.5k to a 401k, plus match, and then be able to contribute another $23350 to a roth 401k?

You are talking about a Mega-backdoor Roth contribution, which most companies do not even offer and can be considered a huge perk.


cangelosibrown

  • Stubble
  • **
  • Posts: 131
Re: Help! - Is this 401k policy normal?
« Reply #3 on: December 11, 2020, 08:28:31 AM »
My employer (also fortune 500) doesn't allow after tax contributions at all. I'd love to be able to put another $23k in there. And they also don't allow in-service distributions/rollovers, so it wouldn't be worth all that much anyway.

MrFunnyMustache

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Re: Help! - Is this 401k policy normal?
« Reply #4 on: December 11, 2020, 08:38:36 AM »
Thanks for everyone's replies so far. Yes, I realize it is a big perk to be able to even make after-tax contributions in the first place, and I'm grateful for that. Please do not get me wrong here. I am simply asking if this capping of the after-tax contributions as I have detailed above is standard practice for employers that do allow after-tax contributions.

ixtap

  • Magnum Stache
  • ******
  • Posts: 3062
Re: Help! - Is this 401k policy normal?
« Reply #5 on: December 11, 2020, 09:04:34 AM »
Thanks for everyone's replies so far. Yes, I realize it is a big perk to be able to even make after-tax contributions in the first place, and I'm grateful for that. Please do not get me wrong here. I am simply asking if this capping of the after-tax contributions as I have detailed above is standard practice for employers that do allow after-tax contributions.

There isn't really "standard practice," as there are so many different options. In this case, they have chosen an accounting method that makes it easy for them to insure noone goes over their limit.

shuffler

  • Bristles
  • ***
  • Posts: 471
Re: Help! - Is this 401k policy normal?
« Reply #6 on: December 11, 2020, 10:16:03 AM »
I am simply asking if this capping of the after-tax contributions as I have detailed above is standard practice for employers that do allow after-tax contributions.
My company has a fixed-dollar after-tax cap for all employees.  IIRC, it's $27,000.
I don't know if they came up with that number in the same manner as yours, but it has the same effect.