Author Topic: 401k road block  (Read 11160 times)

trailrated

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401k road block
« on: May 20, 2014, 11:18:34 AM »
I know I "can" contribute up to $17,500 per year. I do not have an employee match, and after checking with an administrator and talking to the 401k provider I have been told the max I can contribute is 20% of my salary.

I make $65,00/year so the most I can put in is $13,000. Has anyone else experienced this?

I guess it's time to open up a Roth IRA (open to any other recommendations as well)

Winston

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Re: 401k road block
« Reply #1 on: May 20, 2014, 11:52:01 AM »
Do you own more than 5% interest in your company? If so, you may be a "highly compensated employee." If not, I've got nothing (since you don't make more than $115k/yr, which is the other trigger).

matchewed

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Re: 401k road block
« Reply #2 on: May 20, 2014, 11:54:20 AM »
You're dealing with two different sets of rules. The $17.5k is the governments rules. The 20% of salary is from either your employer or the provider. Percent of salary is a fairly common rule. You could essentially petition for a raising of this as you dig further into who made the rule.

A Roth IRA is a perfectly fine investment vehicle. It adds to tax flexibility.

Shor

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Re: 401k road block
« Reply #3 on: May 20, 2014, 12:21:00 PM »
If you are tax filing Single, and up in the 25% tax bracket, it might be more advantageous for you to invest annual max in to a tIRA, rather than a Roth IRA.

Cheddar Stacker

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Re: 401k road block
« Reply #4 on: May 20, 2014, 03:27:38 PM »
You're dealing with two different sets of rules. The $17.5k is the governments rules. The 20% of salary is from either your employer or the provider. Percent of salary is a fairly common rule. You could essentially petition for a raising of this as you dig further into who made the rule.

+1 to this whole quote, but particularly the part I bolded. Talk to the owners or the HR department again. This is a silly limitation and it can be removed by a simple amendment to the plan. It will most likely benefit the owners and other highly compensated employees as well since you would bring up the average contribution rate.

trailrated

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Re: 401k road block
« Reply #5 on: May 20, 2014, 03:30:53 PM »
Awesome responses, I will have updates after the next company meeting.

Joggernot

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Re: 401k road block
« Reply #6 on: May 20, 2014, 03:40:57 PM »
Yes, one company I worked for had a 16% limit.  Apparently theirs was based on the amount of participation of the employees such that employees who didn't participate or only contributed a small amount brought down the percent the others could contribute.  It didn't affect management because 16% of their salaries max'ed out their IRA, while it didn't come close with me.

Mississippi Mudstache

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Re: 401k road block
« Reply #7 on: May 20, 2014, 03:45:49 PM »
I'm baffled to hear about other companies' silly limitations like this. My company allows me to put it up to 75% of my salary into my 401(k), which I did for about 3 months at the end of last year to catch up and reach the federal limit. In fact, my provider (Vanguard) kept pestering me about not contributing enough until I permanently set it at 25% of my salary, which happens to be right at the federal limit for me.

nawhite

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Re: 401k road block
« Reply #8 on: May 21, 2014, 11:23:46 AM »
If you are tax filing Single, and up in the 25% tax bracket, it might be more advantageous for you to invest annual max in to a tIRA, rather than a Roth IRA.

Seconded. It depends on your current age (or how long you'll leave money in the Roth) and your expected effective (not marginal) tax rate in retirement. With a traditional, dollars go into the account and save the 25% marginal rate, when they come out, your effective rate will probably be closer to 8-10% for federal (based on most people here). So you get a one time bonus of 15% assuming tax brackets don't change between now and your retirement.

The only exception is if your money will be in the Roth for so long that you'll end up with many multiples of your original contributions in the account when you retire. In that case, because you won't need to pay taxes on the gains, you can come out ahead doing the roth.

AccidentalMiser

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Re: 401k road block
« Reply #9 on: May 21, 2014, 11:32:20 AM »
You're dealing with two different sets of rules. The $17.5k is the governments rules. The 20% of salary is from either your employer or the provider. Percent of salary is a fairly common rule. You could essentially petition for a raising of this as you dig further into who made the rule.

+1 to this whole quote, but particularly the part I bolded. Talk to the owners or the HR department again. This is a silly limitation and it can be removed by a simple amendment to the plan. It will most likely benefit the owners and other highly compensated employees as well since you would bring up the average contribution rate.

+2.  Get your co-workers involved and respectfully ask your company to change the rules (this one is pretty stupid).

Joggernot

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Re: 401k road block
« Reply #10 on: May 21, 2014, 12:01:27 PM »
You're dealing with two different sets of rules. The $17.5k is the governments rules. The 20% of salary is from either your employer or the provider. Percent of salary is a fairly common rule. You could essentially petition for a raising of this as you dig further into who made the rule.

+1 to this whole quote, but particularly the part I bolded. Talk to the owners or the HR department again. This is a silly limitation and it can be removed by a simple amendment to the plan. It will most likely benefit the owners and other highly compensated employees as well since you would bring up the average contribution rate.

+2.  Get your co-workers involved and respectfully ask your company to change the rules (this one is pretty stupid).
+3  We were able to get the 16% raised to 20% shortly after I joined the company.  Still not enough, but it helped.

Jack

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Re: 401k road block
« Reply #11 on: May 21, 2014, 12:40:38 PM »
If you are tax filing Single, and up in the 25% tax bracket, it might be more advantageous for you to invest annual max in to a tIRA, rather than a Roth IRA.

Or if you're on the edge of Saver's Credit eligibility and going traditional instead of Roth would keep you under the limit (which is possible for someone making $65,000, if he's married filing jointly, his spouse doesn't work and he has enough "above the line" exemptions/deductions).

Iron Mike Sharpe

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Re: 401k road block
« Reply #12 on: May 21, 2014, 01:26:37 PM »
I work for a huge multinational corporation and we can only contribute up to 25% to our 401Ks.  I make $60K a year in salary, so I can't get to the limit either.  Though I max out our work HSA (after the $300 employer gift) and can get over half of a Roth IRA funded.

Pylortes

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Re: 401k road block
« Reply #13 on: May 21, 2014, 07:52:40 PM »
Can you guys help me understand this please?  I work for a company with no cap (other than the federal limit of $17.5k).  I had not heard of these type of limitations before.  They seem ridiculous to me,  but maybe I'm not fully grasping.  Is there some financial benefit to the company to put a 20% or whatever cap on contributions?  What is the rationale behind a limit like this?  Is it a fairness thing?

bop

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Re: 401k road block
« Reply #14 on: May 22, 2014, 07:25:05 AM »
I know that the IRS has certain compliance rules for 401(k) plans, e.g., to make sure that the plans aren't mainly for the benefit of highly compensated employees.  Here's a summary of the rules:
http://www.cpas-401k.com/401k-compliance-testing-rules.html 

Is it possible that the companies imposing say a 20% cap do so to make sure they comply with the IRS rules?

Cheddar Stacker

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Re: 401k road block
« Reply #15 on: May 22, 2014, 10:47:46 AM »
Qualifications/disclaimers:
-I do not work in 401K plan administration or compliance, so I'm not a leading expert in the area.
-However, I am a CPA and I have some knowledge in this area.
-I advise clients on their 401K's to the extent I can, but I send them to the experts when necessary.
-I am one of a few people in charge of running our company's 401K along with our TPA and financial advisors so I'm involved in annual meetings on this topic.

All that said, and after reading the above link to gain a little more knowledge, I see absolutely no reason to limit contributions to 20% as OP mentioned. Maybe I'm missing something and someone smarter than me can figure out a valid reason, but I just don't see it.

Any NHCE (non-highly compensated employee) contribution is a good thing. The more NHCE's contribute, the better it is for the entire plan's flexibility to avoid limiting contributions for HCE's, and to avoid become top heavy or failing any tests that would disqualify the plan and create penalties.

It's maddening when contributions are limited by plan parameters, or lack of participation. I have clients who have their contributions refunded on a regular basis due to lack of participation.

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Re: 401k road block
« Reply #16 on: May 22, 2014, 12:26:51 PM »
There are just a lot of dumb people administering 401(k) plans. My wife's company requires a form if you want to contribute to the 401(k) catch-up. In addition, they stop your year to date contribution at $17,500. So if you are contributing say $1,000 dollars a paycheck and you hit $17,500 with the first $300 dollars of the $1,000 they only stop the contribution at $300 for that paycheck. You have to wait for the next pay period to start contributing for the catch-up. I can't believe this is legal.

Pylortes

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Re: 401k road block
« Reply #17 on: May 22, 2014, 12:42:17 PM »
Chedder Stacker, I agree.  I checked out the link quickly as well and reached some of the same conclusions.  It seems like the goal of making sure the plan is available to non-highly paid employees could be reached by better mechanisms than imposing a % cap.    That cap still doesn't make any sense to me.   A bit of a head scratcher.    Thanks guys for your thoughts. 

Joggernot

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Re: 401k road block
« Reply #18 on: May 22, 2014, 01:15:08 PM »
I know that the IRS has certain compliance rules for 401(k) plans, e.g., to make sure that the plans aren't mainly for the benefit of highly compensated employees.  Here's a summary of the rules:
http://www.cpas-401k.com/401k-compliance-testing-rules.html 

Is it possible that the companies imposing say a 20% cap do so to make sure they comply with the IRS rules?
This is the reason we were given as to why we were limited to 16% and then 20%.  The non-highly compensated employees weren't contributing enough and it looked like another "perk" only for the highly compensated employees.

trailrated

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Re: 401k road block
« Reply #19 on: May 22, 2014, 01:33:47 PM »
That would make sense then... I am in construction and though most of the employees could be taking advantage of the 401k plan, for the most part it is just the finance people and dispatch that actually does contribute. Even after we had a meeting with people explaining the benefits come in.

Thanks for the heads up!

Cheddar Stacker

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Re: 401k road block
« Reply #20 on: May 22, 2014, 02:16:31 PM »
I know that the IRS has certain compliance rules for 401(k) plans, e.g., to make sure that the plans aren't mainly for the benefit of highly compensated employees.  Here's a summary of the rules:
http://www.cpas-401k.com/401k-compliance-testing-rules.html 

Is it possible that the companies imposing say a 20% cap do so to make sure they comply with the IRS rules?
This is the reason we were given as to why we were limited to 16% and then 20%.  The non-highly compensated employees weren't contributing enough and it looked like another "perk" only for the highly compensated employees.

Joggernot, I think your company's management is confused. 

If the NHCE's contribute an average of 7%, the HCE's can contribute an up to 9% or so. If they put a limit of 20% in place they are potentially limiting their own contribution rate.

Example with 10 NHCE's and a 75% wage contribution limit:
    Wages     Rate     Contr.
1    50,000    0%    -
2    50,000    0%    -
3    50,000    0%    -
4    50,000    0%    -
5    50,000    0%    -
6    50,000    0%    -
7    50,000    0%    -
8    50,000    0%    -
9    50,000    35%    17,500
10   50,000    35%    17,500
         
Tot   500,000    70%    35,000
Avg    50,000    7%   7.00%

You have 10 employees. All of them make $50K. 8 of them "can't afford" to contribute to a 401K. 2 of them are mustachians and want to max out. In this scenario they can, and HCE's can contribute around 9% or so of their own wages. $17,500 / 9% = $194,444 in wages.

Now let's use your company's arbitrary 20% contribution limit and see what happens:
    Wages     Rate     Contr.
1    50,000    0%    -
2    50,000    0%    -
3    50,000    0%    -
4    50,000    0%    -
5    50,000    0%    -
6    50,000    0%    -
7    50,000    0%    -
8    50,000    0%    -
9    50,000    20%    10,000
10   50,000    20%    10,000
         
Tot   500,000    40%    20,000
Avg    50,000    4%   4.00%

Because of the 20% limit, the average NHCE contribution is now 4%, so the maximum HCE contribution is about 6%. $17,500 / 6% = $291,667 in wages.

They are not only screwing the 2 smart people who want to max out by $7,500, but they also now have to earn $100K more in wages just so they can max out. I don't see how this helps anyone.

nawhite

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Re: 401k road block
« Reply #21 on: May 22, 2014, 04:33:45 PM »
CheddarStacker, I agree that their management is bad at math, but I think what Joggernot was saying is that if the company sets the limit at 75% then many employees (and maybe the IRS) may feel like that is a perk only available to the people at the company who make a lot of money because "how in the world could someone contribute 75% to their 401k?!?! you'd have to make MILLIONS to be able to do that?!?!" (because they don't understand the way it really works).

frugalnacho

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Re: 401k road block
« Reply #22 on: May 22, 2014, 10:56:42 PM »
I know that the IRS has certain compliance rules for 401(k) plans, e.g., to make sure that the plans aren't mainly for the benefit of highly compensated employees.  Here's a summary of the rules:
http://www.cpas-401k.com/401k-compliance-testing-rules.html 

Is it possible that the companies imposing say a 20% cap do so to make sure they comply with the IRS rules?
This is the reason we were given as to why we were limited to 16% and then 20%.  The non-highly compensated employees weren't contributing enough and it looked like another "perk" only for the highly compensated employees.

That doesn't even make sense. 

Cheddar Stacker

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Re: 401k road block
« Reply #23 on: May 22, 2014, 11:01:43 PM »
CheddarStacker, I agree that their management is bad at math, but I think what Joggernot was saying is that if the company sets the limit at 75% then many employees (and maybe the IRS) may feel like that is a perk only available to the people at the company who make a lot of money because "how in the world could someone contribute 75% to their 401k?!?! you'd have to make MILLIONS to be able to do that?!?!" (because they don't understand the way it really works).

Yeah, I got the same thing from it, just didn't think it made much sense. They are limiting their employees and themselves based on their perception of what other peoples perception might be. wha? Decide based on what you know and can control, not a bunch of maybe's.

BTW, my wife is currently contributing 75% of her earnings to her 401K. Her earnings are small, but it's nice she has the option.

Joggernot

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Re: 401k road block
« Reply #24 on: May 23, 2014, 10:17:32 AM »
I know that the IRS has certain compliance rules for 401(k) plans, e.g., to make sure that the plans aren't mainly for the benefit of highly compensated employees.  Here's a summary of the rules:
http://www.cpas-401k.com/401k-compliance-testing-rules.html 

Is it possible that the companies imposing say a 20% cap do so to make sure they comply with the IRS rules?
This is the reason we were given as to why we were limited to 16% and then 20%.  The non-highly compensated employees weren't contributing enough and it looked like another "perk" only for the highly compensated employees.

That doesn't even make sense.
Their logic was that if only HCEs participated, then the IRS would hold that it was a perk for the HCEs, and not a benefit for all employees.  See below for their logic.
Employee
Salary      % put into the benefit
30k          0%
30k          0%
40k          0%
etc.
250k       16%
250k       16%
300k       16%
350k       16%
From this, only the HCEs are participating, thus, only the HCEs are benefitting from the program.  IRS can rule that it is a perk for the HCEs only.  As one of the lower paid employees, I wanted to participate at a high rate, but very few other lower paid employees wanted to participate, let alone at a high rate.

wij

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Re: 401k road block
« Reply #25 on: May 24, 2014, 02:32:51 PM »
I think a 20% limit on 401k contributions is a disservice. Especially when it prevents people from reaching the legally established $ limit. In OP's situation, it would seem then that only people earning more than $87.5K would be able to max out.

I would argue that the ability to have a higher or no limit is a benefit to all employees because sometimes people need to up their contribution percentage in a significant way at the end of the year to max out.

Why should an employee be prevented from maxing out if they want to, either throughout the year or by some year-end very high contributions? It is in fact those who are compensated less who actually do need to have a higher percentage of their paycheck taken out to reach the max. So this really seems unfair.

Edit: I don't know if this "limit" is on a per paycheck level or year-wide. Either way it seems wrong to me and something worth working to change, because of its potential to help improve people's savings potential.
« Last Edit: May 24, 2014, 02:43:56 PM by wij »

Runner77

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Re: 401k road block
« Reply #26 on: May 25, 2014, 06:04:06 AM »
At one point, I believe all 401(k) plans had a maximum of 15%. That reg was changed, possibly in 2001, but some plans have never updated their plan document to allow a rate higher than 15%.

ch12

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Re: 401k road block
« Reply #27 on: May 25, 2014, 06:16:17 AM »
CheddarStacker, I agree that their management is bad at math, but I think what Joggernot was saying is that if the company sets the limit at 75% then many employees (and maybe the IRS) may feel like that is a perk only available to the people at the company who make a lot of money because "how in the world could someone contribute 75% to their 401k?!?! you'd have to make MILLIONS to be able to do that?!?!" (because they don't understand the way it really works).

Yeah, I got the same thing from it, just didn't think it made much sense. They are limiting their employees and themselves based on their perception of what other peoples perception might be. wha? Decide based on what you know and can control, not a bunch of maybe's.

BTW, my wife is currently contributing 75% of her earnings to her 401K. Her earnings are small, but it's nice she has the option.

For the past few months I've been contributing 77% to my 401k. I'm so glad my company doesn't have the idiotic 20% cap. Yeah, back in the day contributions were limited to a lower percentage a year, before the fed decided that everyone should be able to contribute up to the cap.

frugalnacho

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Re: 401k road block
« Reply #28 on: May 28, 2014, 12:34:38 PM »
I know that the IRS has certain compliance rules for 401(k) plans, e.g., to make sure that the plans aren't mainly for the benefit of highly compensated employees.  Here's a summary of the rules:
http://www.cpas-401k.com/401k-compliance-testing-rules.html 

Is it possible that the companies imposing say a 20% cap do so to make sure they comply with the IRS rules?
This is the reason we were given as to why we were limited to 16% and then 20%.  The non-highly compensated employees weren't contributing enough and it looked like another "perk" only for the highly compensated employees.

That doesn't even make sense.
Their logic was that if only HCEs participated, then the IRS would hold that it was a perk for the HCEs, and not a benefit for all employees.  See below for their logic.
Employee
Salary      % put into the benefit
30k          0%
30k          0%
40k          0%
etc.
250k       16%
250k       16%
300k       16%
350k       16%
From this, only the HCEs are participating, thus, only the HCEs are benefitting from the program.  IRS can rule that it is a perk for the HCEs only.  As one of the lower paid employees, I wanted to participate at a high rate, but very few other lower paid employees wanted to participate, let alone at a high rate.

That still doesn't make any sense and seems totally illogical.  Why should anyone's voluntary participation affect anyone else?  The IRS already has a limit in place.  So long as those non HCE have the option available and aren't contributing voluntarily I can't understand how the rule makes any sense.  It doesn't actually accomplish anything.

xenon5

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Re: 401k road block
« Reply #29 on: May 28, 2014, 02:47:40 PM »
The limit at my company is 50%.  In other words, you have to make at least $35k to be allowed to contribute fully to a 401k.  I'm not affected by this rule and most people who work for the company wouldn't be, but it's pretty silly that the rule exists at all.

All this kind of rule does is punish people who make less than $17500/<arbitrary %> for no reason.
« Last Edit: May 28, 2014, 02:54:32 PM by xenon5 »