Author Topic: Why do companies limit 401k contributions??  (Read 3318 times)

Pizzabrewer

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Why do companies limit 401k contributions??
« on: March 15, 2017, 05:21:24 PM »
Just curious why there are limits on contributions. My wife's work has a cap at 50%. Given her salary and the fact we're almost through the first quarter, unfortunately that won't get her close to $18k for the year. Why would they care if she wanted to contribute say 60%?

extremedefense

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Re: Why do companies limit 401k contributions??
« Reply #1 on: March 15, 2017, 06:25:38 PM »
The actual limit is 75%, her employer seems weird.

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letired

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Re: Why do companies limit 401k contributions??
« Reply #2 on: March 15, 2017, 07:49:55 PM »
I can't cite any sources, but I think sometimes it has to do with rules around 'highly compensated employees'. Basically they're trying to make it more fair, but it bends my brain a little. There is a safe harbor thing that can be done, but apparently not all plans do it???

MDM

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Re: Why do companies limit 401k contributions??
« Reply #3 on: March 15, 2017, 10:41:15 PM »
Just curious why there are limits on contributions. My wife's work has a cap at 50%. Given her salary and the fact we're almost through the first quarter, unfortunately that won't get her close to $18k for the year. Why would they care if she wanted to contribute say 60%?
I'll make a small wager that the cap is arbitrary (IIRC, once upon a time there was a 25% IRS-imposed limit, but that is long gone) and nobody has ever asked about it.  Your wife should ask the HR/benefits department about it.

The only good reasons not to allow a non-Highly Compensated Employee to contribute up to 100% of gross pay are that the company is still liable to withhold Social Security and Medicare taxes, and there may be pre-tax insurance, etc. to pay.

MoonLiteNite

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Re: Why do companies limit 401k contributions??
« Reply #4 on: March 16, 2017, 05:24:21 AM »
I can't cite any sources, but I think sometimes it has to do with rules around 'highly compensated employees'. Basically they're trying to make it more fair, but it bends my brain a little. There is a safe harbor thing that can be done, but apparently not all plans do it???

This would be my best guess.
But working my 5$/hr job it was capped at 90.
When i worked at small cap company it was 25%
And now with blue chip company, it is 50%.

Elle 8

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Re: Why do companies limit 401k contributions??
« Reply #5 on: March 16, 2017, 05:34:40 AM »
The actual limit is 75%, her employer seems weird.

My company allows 100%, so I don't think that is true.

chasesfish

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Re: Why do companies limit 401k contributions??
« Reply #6 on: March 16, 2017, 05:39:54 AM »
50% is the default maximum in many 401k plan documents.   There's no real reason behind it, other than preventing errors where employees accidentally contribute more than that (say you're doing 8% and accidentally sign up for 80%).

She should make an inquiry into her HR department and see if it can be changed. 

erae

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Re: Why do companies limit 401k contributions??
« Reply #7 on: March 17, 2017, 08:12:49 AM »
I've front-loaded my 403b the last two years by contributing 100% of my paycheck beginning with the first paycheck in the calendar year and continuing until I hit 18k. All medical, SS, etc. is taken out of the check first and then what's left goes into my retirement account.

TheAnonOne

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Re: Why do companies limit 401k contributions??
« Reply #8 on: March 17, 2017, 09:01:19 AM »
I have the same issue with my wife, they only allow 30% and she makes about 45. She can never max her 401k.

I however, maxed my 401k by my 3rd paycheck this year by setting my contributions to 100%.

There is no limit by law.

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Dicey

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Re: Why do companies limit 401k contributions??
« Reply #9 on: March 17, 2017, 09:10:33 AM »
I'll make a small wager that the cap is arbitrary (IIRC, once upon a time there was a 25% IRS-imposed limit, but that is long gone) and nobody has ever asked about it.  Your wife should ask the HR/benefits department about it.
And we have our winner!

Your dear wife should hightail it to HR. If they're no help, which will most likely be the case,  she needs to head straight to the top. Go to the owners, but do so politely, with a copy of the tax code in hand. Her effort could result in better circumstances for all.

less4success

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Re: Why do companies limit 401k contributions??
« Reply #10 on: March 17, 2017, 09:12:45 AM »
I really wish we'd just get rid of 401ks and instead increase IRA eligibility/contribution limits to be similar (and protect IRAs from creditors at the federal level)...

CptCool

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Re: Why do companies limit 401k contributions??
« Reply #11 on: March 17, 2017, 09:14:04 AM »
Most employers have an arbitrary limit in order to minimize the chances of a paycheck being negative. 401k + taxes + benefits + other elections can quickly add up to being over 100% of the paycheck.

My company lets me put in as much as I want and just warns me if I have to lower the contribution so I don't have a negative paycheck. My wife can't contribute more than 50%. I like my company's method a lot more, but it certainly is more work for the benefits/HR dept.

brian313313

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Re: Why do companies limit 401k contributions??
« Reply #12 on: March 17, 2017, 01:36:24 PM »
My wife was limited to 25% and only making 40k that limited her to 10k contributions. It's ironic that they said it was HCE rules. The HCE employees could all max based on a percentage so it only limited the lower paid employees.