Calculating 401k contribution percentage

[Jack]

For the first half of this year, I had a relatively low-paying job and was only contributing enough to my 401k to get the company match. I got a better job, became eligible for its 401K around October, and have been contributing "99% of salary"  (it actually seems to be 100%; my take-home pay has been $0) of my salary since then in order to get as close to the $18,000 max as possible. It looks like I'll make it!

In fact, if I leave the contribution percentage that high, I'll go a couple hundred bucks over, so I need to lower it. And because my current 401k doesn't know about the contributions to my old 401k, I have to calculate the correct contribution percentage manually. How do I do that?

The hard part is that when the form says "percentage," I have to ask "of what -- gross pay, net pay, or gross minus deductions (but before taxes)?" The HR person says she thinks it's net pay, but isn't sure. And if it is net pay, that makes the calculation more complicated because the amount of the 401K contribution affects tax withholding, and tax withholding affects how many dollars a given percentage of pay represents. (And, of course, I don't know how per-paycheck tax withholding gets calculated.) If I knew the equation I could just solve for X, but I don't know the equation.

Thanks for your help!

[desk_jockey]

Mine is a percentage of gross pay.   I would guess that most 401Ks are of gross pay, as you're taking it out before all taxes except social security.   It is reprehensible that HR person does not know the answer for your company.

How do you calculate it manually?  Look at your last pay statement under the previous company to find out how many dollars that you put in (excluding matching).   Then deduct that amount from $18000 and that's the total dollars that you can put in under the new company for the remainder of the year.    That number divided by your expected gross pay for the rest of the year gives you the percentage (if your company does 401K deposit calculations on gross pay).   It's an easy calculation if you're salaried, without a significant variable component.   Assuming that you can adjust easily throughout the year, just monitor how much you'll paid in already and adjust the future percentage accordingly. 

[seattlecyclone]

In my experience it's a percentage of gross pay, but I really doubt that's a legal requirement. Your plan may indeed use a percentage of net pay as your HR person believes.

[Jack]

Look at your last pay statement under the previous company to find out how many dollars that you put in (excluding matching).   Then deduct that amount from $18000 and that's the total dollars that you can put in under the new company for the remainder of the year.    That number divided by your expected gross pay for the rest of the year gives you the percentage (if your company does 401K deposit calculations on gross pay).   It's an easy calculation if you're salaried, without a significant variable component.

Well yeah, if it were that obvious I wouldn't have started the thread. But what if it's not gross pay, as the HR person thinks?

Anyway, I just called the (third-party) 401k plan adviser and asked him about it, and he's going to call the plan administration company to ask them. So maybe I'll have a more solid answer soon.

[Frugalman19]

I'm confused, can't you just take your last contribution and divide it but your gross pay and see if its 99% or not. Mine is of my gross pay every time. So if My gross is 2,500 and I'm withholding 10%, it's always $250. If you have health insurance taken out then it gets tricky, but the percentage is still of gross pay. I would assume the HR person doesn't run into people putting in 100% every often, good job mate!

[JordanOfGilead]

It's not unusual for HR people to not understand payroll math, even if it is their responsibility. I was discussing my company's 401k match with HR a few months ago and it went something like this

HR: So we offer a 50% match up to 5% of your gross salary
Me: Is that 5% contributed by me or 5% matched
HR: 50% up to 5% of your salary
Me: Yes, but does that mean that if I contribute 10%, you will match 5% or do you stop at 2.5%
HR: I don't think you understand what I'm saying. We match 50% up to 5% of your gross salary

Turns out it was HER that didn't understand what she was saying and the actual policy was a 50% contribution match up to a 5% employee contribution (aka, a 2.5% maximum match).
A lot of HR jobs don't require any background in math or finance so it's hit-and-miss when it comes to finding one that understands retirement plans fully.

[Heywood57]

Something like

18000 - ( <prior job contribution> + <current job contributions> ) = <last contribution>

assuming this will be the last pay period of the year
<last contribution> / <pay amount> = <percentage>

[Vilgan]

Also if you just notify HR how much you deferred at the last job, they should be able to cap it to exactly that so you don't have to do all this percentage math.

[Jack]

Something like

18000 - ( <prior job contribution> + <current job contributions> ) = <last contribution>

assuming this will be the last pay period of the year
<last contribution> / <pay amount> = <percentage>

I knew that much myself, but the question is, what is <pay amount>? So far, the answers I've gotten are as follows:

• HR person: net pay, after both insurance (etc.) deductions and taxes
• third-party 401k adviser, who called the plan administrator to ask them: gross pay (you can't actually get that much if your contribution percentage is very high, because insurance (etc.) still gets deducted, but that's the calculation for what it attempts to deduct)
• other HR person: gross pay minus insurance (etc.) deductions, but before taxes

Also, it turns out that we have two pay periods left (the second one ends on Jan 1, but that's a holiday, so we get paid the day before). So now I have to go ask if that paycheck will still have the normal 80 hours of work included in it or not, on top of everything else. And I have to remember to leave some 401k contribution space to get the company match for that period.

I'm fairly confident about the following:

• Basing the calculation on gross pay is the most conservative assumption, since that equation has the largest denominator
• <remaining contribution>  / <gross pay> = 74% (rounded down)
• Getting full company match requires contributing 6%.

So, at the moment, I think my course of action is as follows:

• Adjust my contribution to 74% - 6% = 68% (or a little bit less) for this (Dec 18) paycheck
• Look at the Dec 18 pay stub to figure out exactly how the percentage actually works (which should be possible once my net pay is no longer $0, since the equation will no longer be degenerate).
• adjust it again to 6% (or a little bit more) for the Dec 31 paycheck.

(On a side note, I wish all 401k plans would simply allow a dollar-amount contribution instead of a percentage amount, so I wouldn't have to deal with all this bullshit...)

Also if you just notify HR how much you deferred at the last job, they should be able to cap it to exactly that so you don't have to do all this percentage math.

I'll look into that. The 401k administrator is a third party, and they have a "goal amount," but I didn't see a way to set it to anything other than $18K via the web interface.

[hypocrispy]

I feel like 401K providers make this harder than it needs to be. Or is this just me?

I don't understand why we need to work in percentages at all from the provider side. I understand why from the HR and Benefits side so that we can clearly understand what our employer is doing for us. But on the provider side, why can't I say take $XXX dollars from my paycheck until $XX,XXX is reached for the year? Hell, I'd be happy with $XXX per check and manage the cap myself.

My own paycheck fluctuates wildly depending on how much overtime I'm working and what shift I happen to be on that week. (I cover a lot of 3rd shift Ops which makes a off-shift premium here). So the percentage thing drives me crazy. However, I am VERY new at all of these and am probably missing something vital. I'll be keeping an eye on this thread.

(On a side note, I wish all 401k plans would simply allow a dollar-amount contribution instead of a percentage amount, so I wouldn't have to deal with all this bullshit...)

Haha, guess I'm not the only one.

[Vilgan]

I feel like 401K providers make this harder than it needs to be. Or is this just me?

I don't understand why we need to work in percentages at all from the provider side. I understand why from the HR and Benefits side so that we can clearly understand what our employer is doing for us. But on the provider side, why can't I say take $XXX dollars from my paycheck until $XX,XXX is reached for the year? Hell, I'd be happy with $XXX per check and manage the cap myself.

My own paycheck fluctuates wildly depending on how much overtime I'm working and what shift I happen to be on that week. (I cover a lot of 3rd shift Ops which makes a off-shift premium here). So the percentage thing drives me crazy. However, I am VERY new at all of these and am probably missing something vital. I'll be keeping an eye on this thread.

(On a side note, I wish all 401k plans would simply allow a dollar-amount contribution instead of a percentage amount, so I wouldn't have to deal with all this bullshit...)

Haha, guess I'm not the only one.

My understanding is that its not the 401k providers, its a choice that your employer makes. Most 401k providers offer either option I believe.

However, almost every employer should select the percentage option. They want higher contribution %s and most people will not go back and adjust it higher. If someone sets it to "3%" then as they get raises and bonuses it stays at 3%. If they set it to "$5000" then as they get raises and bonuses, they contribute a smaller % each year unless they go back to correct it and almost no one does. This smaller % makes it harder to pass tests, they might miss out on a match, etc.

It sucks for the minority who DO want to actively manage their contribution, but its a decision made in the interests of employees for their own good and its usually the right one.

[hypocrispy]

I feel like 401K providers make this harder than it needs to be. Or is this just me?

I don't understand why we need to work in percentages at all from the provider side. I understand why from the HR and Benefits side so that we can clearly understand what our employer is doing for us. But on the provider side, why can't I say take $XXX dollars from my paycheck until $XX,XXX is reached for the year? Hell, I'd be happy with $XXX per check and manage the cap myself.

My own paycheck fluctuates wildly depending on how much overtime I'm working and what shift I happen to be on that week. (I cover a lot of 3rd shift Ops which makes a off-shift premium here). So the percentage thing drives me crazy. However, I am VERY new at all of these and am probably missing something vital. I'll be keeping an eye on this thread.

(On a side note, I wish all 401k plans would simply allow a dollar-amount contribution instead of a percentage amount, so I wouldn't have to deal with all this bullshit...)

Haha, guess I'm not the only one.

My understanding is that its not the 401k providers, its a choice that your employer makes. Most 401k providers offer either option I believe.

However, almost every employer should select the percentage option. They want higher contribution %s and most people will not go back and adjust it higher. If someone sets it to "3%" then as they get raises and bonuses it stays at 3%. If they set it to "$5000" then as they get raises and bonuses, they contribute a smaller % each year unless they go back to correct it and almost no one does. This smaller % makes it harder to pass tests, they might miss out on a match, etc.

It sucks for the minority who DO want to actively manage their contribution, but its a decision made in the interests of employees for their own good and its usually the right one.

That makes a lot more sense! Thanks for clarifying, Vilgan!

[DavidAnnArbor]

My %contribution to a 457 plan for a part time job is 89% of Gross Pay, which takes care of nearly the entire pay check, such that I get a very small amount. The other 11% includes the standard FICA but also includes some kind of retiree health care thing.

[Elle 8]

I've worked with these plans a little bit and I've never seen it based on net pay.  However, the pay it is based on depends on how it is defined in the plan documents.  I've seen it based on base pay (no overtime, bonuses, stuff like that) or W2 pay (includes OT, bonuses).  Some plans will exclude things like cell phone reimbursement or other allowances the employee gets (housing allowance, for example).  It's very complicated and I would be surprised if an HR rep did know how to calculate it (unless all your pay is only regular pay, then they should know).  We tell the HR reps to refer employees to the benefits department if they're not sure.  For smaller companies without a benefits department, I would think they should be referred to the plan administrator.

If you elect 100%, there would still be some taxes and if you had other deductions (health care, life ins etc) they would come out before the 401K so you would probably never get the full 100%.

My company allows us to elect either a percentage or a dollar amount so that is nice.   Companies that don't may have systems limitations which don't allow it. 

[FIRE_Buckeye]

As others have said, the % option is almost always a % of your gross pay.

[DaMa]

My contribution is a % of gross pay.  I can't get it to come out to exactly $18,000 (or even within a few dollars).  There is no entry for a $ amount, just %.  Do you have this issue?  What do you do?

[letired]

I've never had to deal with it, but if you over-contribute, I believe there is a grace period in which you can correct any over-contribution before you pay your tax bill for the year. I'm sure it's kind of a PITA, but if HR isn't cooperating, it might just be the way to go.

Also, there is a 99% certainty the percentage is of gross pay. Basing it off net pay would be entirely insane (though I guess I've heard enough stories on these forums that it's not entirely out of the realm of possibility).

[ronster]

Ask your employer for a copy of the plan's "Basic Plan Document". They are required by law to furnish this upon request. This will have a detailed definition of plan compensation. Plan compensation can vary from plan-to-plan. Some plans are designed to exclude certain forms of compensation, others may be based on your gross W2 pay or even a less inclusive definition that is based on compensation subject to tax withholding at the source.
*They may just try to give you a Summary Plan Description (SPD), but ask for the plan document. The SPD contains basic info and may not provide as detailed definition of comp as the document.

[Jack]

For those of you sitting on the edge of your seats waiting for the outcome, it turns out it was based on gross pay all along. I'm going to get within $11 of the IRS maximum!