100% 401k Contribution with Employer Match?

[nirodha]

Let's say I'm going to leave my job early 2021, the minute I max my 401k contribution. My employer has a 6% match. Can I:

A. Contribute 100%, leaving the moment I hit $19500, banking 106% after the match.

Or am I required to:

B: Limit my contribution to 94.3%, working until I earn 20,678 to max the 401k limit of $19500. Thus, ensuring my contribution, after employer match, is not over 100%.

I've found some indication contributions over 100% incur a penalty and are double taxed, but I'm not sure if option A falls under this scenario. Someone on the forum must have solved for this.

[maizefolk]

Employer contributions aren't subject to the same $19,500 limit as employee contributions so you can choose option #1.

The total of employer plus employee contributions also has a limit ($57,000 in 2020). But if your employer's contributions are so generous you are bumping up against that limit it's a really good problem to have.

Edit: But you still may not be able to contribute 100% of your paycheck to your 401k, because 401k contributions are not exempt from payroll taxes so you'd end up with a paycheck for a negative number.

[secondcor521]

What maizefolk said is correct (after the edit :) ).

Generally speaking, you're required to pay SS and Medicare taxes on your earnings regardless of your 401(k) contribution.  Because of this, most HR departments limit the percentage deferral to something under 90%.

As a practical matter, ask your HR what the maximum deferral percentage is then make your plans based on that.

Finally, if you're going to execute this strategy (of leaving ASAP after maxxing your 401(k)), you may find it to your advantage tax-wise to contribute to a Roth or Roth 401(k) option, because your income for 2021 might be relatively low and thus the value of the tax deferral of a traditional 401(k) is similarly relatively low.  When I FIREd in 2016 in similar circumstances, I did 401(k) only enough to get the match then did Roth contributions (didn't have a Roth 401(k) at the time).

[moof]

Generally the 6% match is only on your salary for the months you pay in, so you’d get 0.5% of your salary match for each month you are contributing, which will be close to the 106%of 19500.  Vacation payouts generally are not matched, and you should check with HR as to whether that payout will be able to be sent to the 401k or will simply be in your final check.  Also check as to when benefits cutoff, some places go to month end, others turn them off immediately.

Also look at your taxes for the year to determine if Roth 401k or traditional IRA will be better given your tax situation for that year.

[nirodha]

Great point on the roth 401k, I had not considered it. If I pull the trigger, this year's income will be managed to maximize ACA subsidies. That does make the roth 401k more appealing.

My employer does an end of year true up when front loading the 401k. I'd really only get 0.5% match per month worked, since I would be around for the true up.

It sounds like other considerations will make my concern over exceeding the 100% contribution max moot. Thanks all.

[nirodha]

75% was the maximum contribution I could elect via the website.

[Zamboni]

^Glad you had the option to contribute 75%!

The first employer I worked for only allowed us to contribute 15% max to the 401K, which was a drag. Sounds like you have a pretty sound strategy for the exit.

[KarefulKactus15]

Funny you found out it was 75%.

I have a post on here where it was set to 100% and broke the companies payroll software. (First person to ever do it... Hard to believe for such a large company)

[nirodha]

Breaking the payroll software is fantastic. My company is full of nerds, so this must have come up in their past.

I am still deciding on exit. It is very possible. I am debating on quit vs. advocate for change like someone who has nothing to lose.

[KarefulKactus15]

Breaking the payroll software is fantastic. My company is full of nerds, so this must have come up in their past.

I am still deciding on exit. It is very possible. I am debating on quit vs. advocate for change like someone who has nothing to lose.

Harsh truth.  Change won't happen and everyone will forget you existed 3 weeks later.   My vote is go quietly.

You want people to say "Where's nirodha, he on vacation? Haven't seen him in a while"

[nirodha]

The cynic in me agrees with you, but there are downsides of going quietly:

1. Giving up on the people left behind
2. No chance at a layoff and up to $12k of unemployment benefits.

Part of me thinks dragging out a quiet departure, to capture the extra $12k (if I really care) is a better strategy.

The various engineer your layoff threads have given me a lot to consider. I hate leaving money on the table, but I also don't need it.

[ronsbusa3]

Our plan is to retire 4/1/21
I just set my wife’s 401k to 100% (empower 401k)and my 401k to the 75% (fidelity 401k)allows.
We would like to keep our income as low as possible for ACA.
I didn’t think about the FICA Tax.
Do you think I should contact her Hr department or reduce the percentage to 90%?

[maizefolk]

My guess is either you will break payroll software and they will e-mail you, or it's designed to handle this and a setting to contribute 100% of pay will end up being 100% of your net pay post payroll tax deductions.

And if neither happens and you end up with a negative paycheck, you'll be no worse off (just have to pay the payroll tax you would anyway) and will have a fun anecdote you can tell in the future about how your last paycheck before retirement was actually negative.*

[PDXTabs]

My guess is either you will break payroll software and they will e-mail you, or it's designed to handle this and a setting to contribute 100% of pay will end up being 100% of your net pay post payroll tax deductions.

Yup, my spouse set hers to 90% one time and payroll called her to tell her:
1. They weren't going to do that, because after FICA and benefits her check was going to be negative.
2. If she didn't fix it they would just zero it out and put 0% in her 401a.

[ronsbusa3]

My guess is either you will break payroll software and they will e-mail you, or it's designed to handle this and a setting to contribute 100% of pay will end up being 100% of your net pay post payroll tax deductions.

And if neither happens and you end up with a negative paycheck, you'll be no worse off (just have to pay the payroll tax you would anyway) and will have a fun anecdote you can tell in the future about how your last paycheck before retirement was actually negative.*

Thanks for the quick feedback. A negative paycheck would be the icing on the retirement cake. Lol