Why would a company limit your 401K contributions?

[Deleted]

My job limit for 401K contributions is the $16,500 or 25% of your income (I just raised mine to 25% instead of waiting till June like we planned too).

At my old job it was you could not contribute more than 85% of your income which I believe is the IRS limit. So where would my job come up with that percentage?

I asked my HR person and she could not give me an answer besides these were the rules/guidelines.

I know they are other investments vehicles and we do intend to use them but the question is how do they come up with that limit percentage wise?

[Deleted]

Usually those kind of limits are hold overs from when the IRS limited contributions to accertIn percentage of pay. Now you can contribute up to 100 percent Of your pay. But many old Plans were written with limits that matched old IRS limits. If the plan hasn't been updated in awhile the company may still have the limit.

[SVT]

My old company had a 15% limit. My company now has a 90% limit.

[Savoir Faire-Demogague in NJ]

Cawiau,
I'd recommend you check this, rather than going hog wild with your contribution percentage. In order to get the maximum company contribution to your account, you have to be in the plan the full 12 months making at least the minimum to get the full company match.
If you max out sooner than the end of the year, you will not get the company match for the remainder of the year.
Check with your HR department.

[MN-Investor]

I haven't looked at 401(k) rules for a very long time, but I do know that there are anit-discrimination rules that an employer needs to follow. They can't have a plan in which management and upper salary employees contribute disproportionately compared to the remaining staff. There are certain tests to determine that and there are certain safe harbor rules available. So the contribution limits in your company's plans may be a result of the company needing to limit contributions of the higher paid individuals.

[Deleted]

Limiting contributions based on a percentage of pay is discriminatory in that it allows higher comped indivduals to contribute more that lower comped individuals.

[Taxman10]

Mar 5, 2011 9:43:13 GMT -5 ArchietheDragon said:

Usually those kind of limits are hold overs from when the IRS limited contributions to accertIn percentage of pay. Now you can contribute up to 100 percent Of your pay. But many old Plans were written with limits that matched old IRS limits. If the plan hasn't been updated in awhile the company may still have the limit.

this is most likely correct -- a lot of plans just never get updated. Ask your company to update their plan.

[WannabeWealthy]

I think the OP is stating why does the IRS have a maximum contribution limit of 16,500 for an individual. This is not determined by the job but the IRS. In answer to your question, I'm not sure either.

[Deleted]

Mar 5, 2011 17:56:31 GMT -5 WannabeWealthy said:

I think the OP is stating why does the IRS have a maximum contribution limit of 16,500 for an individual. This is not determined by the job but the IRS. In answer to your question, I'm not sure either.

No, I understand that the IRS has the $16,500 limit and my job cannot change that..

My issue is I could not max at the $16,500 even if I wanted too because my company limit my contributions to 25% of my incomem

[Deleted]

Mar 5, 2011 19:07:57 GMT -5 @toughtimes said:

You've probably run afoul of "top-heavy" rules. These limited contributions by top earners when the peons put little or nothing in.

I hope that this is not the case because it would be sad that I am considered highly compensated at $53,000/year salary.
I would need to make $66,000/year to max my 401k with their contribution limit.

[Deleted]

Mar 5, 2011 13:36:23 GMT -5 Savoir Faire-Demogague in NJ said:

Cawiau,
I'd recommend you check this, rather than going hog wild with your contribution percentage. In order to get the maximum company contribution to your account, you have to be in the plan the full 12 months making at least the minimum to get the full company match.
If you max out sooner than the end of the year, you will not get the company match for the remainder of the year.
Check with your HR department.

Thank you sv and I already looked into it but since I cannot max, will not be an issue. But when I was asked i was told I would still get the full amount if that were to happen since our company matches thru profit sharing plan and they only update it at the end of the fiscal year.

[Deleted]

Cawiau -
My former company was the same way - limited it to 20%. I asked many times in HR and at corporate meetings in the earlier part of my career why they would limit and never got a satisfactory answer. It was how the plan was set up was they only answer I could get.

When I asked the HR manager why they didn't update the plan, he told me that few enough people ever even hit the 20% mark that it wasn't worth the time & cost to do so. He told me that it would likely never happen.

[schildi]

Mar 5, 2011 13:36:23 GMT -5 Savoir Faire-Demogague in NJ said:

Cawiau,
I'd recommend you check this, rather than going hog wild with your contribution percentage. In order to get the maximum company contribution to your account, you have to be in the plan the full 12 months making at least the minimum to get the full company match.
If you max out sooner than the end of the year, you will not get the company match for the remainder of the year.
Check with your HR department.

SF, this is different at different companies. Most of what you said here (edit: all, not most) does not apply to the plan I have, for example.

[schildi]

Years ago, my company limited the contributions to 12.5% or so, not it's 50%. So they did not forget to adjust the percentage, but do not allow more than 50% either.
One reason I could see is that 100% is not really possible, because they need to deduct your FICA taxes, and the 401(k) contributions are based on gross (at least at my company). So 100% is not possible. Not sure how they come up with 50%, but it kinda makes sense to me. Taxes are spread over the year based on my "anticipated" gross, so they are deducted as well, at the same rate throughout the year. Even if I would put in 50% at the beginning of the year and then nothing because I maxed the $16,500.
The 25% sounds low, though. No idea why your company does that.

[Deleted]

Mar 6, 2011 7:56:31 GMT -5 @toughtimes said:

53K is small-beer in most industries, but if you are working in say, retail, where a high percentage of workers are getting minimum wage, you could run afoul of those rules, you tycoon, you.

I see how that might apply.

I increased mine to 25 and will do the same for my wife after we move in june (same time for my review). I guess we will just make up the difference with our ROTH IRA and taxable accounts.

[Savoir Faire-Demogague in NJ]

Thank you sv and I already looked into it but since I cannot max, will not be an issue. But when I was asked i was told I would still get the full amount if that were to happen since our company matches thru profit sharing plan and they only update it at the end of the fiscal year.

I do not think it matters if you are maxing out to $16,500, your company only matches up to a certain percentage. Let's say they match up to 6% of your contributions. If you contribute at least 6%, and are in the plan for 12 months, you get the full company match. It has nothing to do with whether or not you can reach the $16,500 limit.

Please talk to HR, you could be losing out on some money.

This is a misunderstood feature.

[Deleted]

Mar 6, 2011 10:23:35 GMT -5 Savoir Faire-Demogague in NJ said:

Thank you sv and I already looked into it but since I cannot max, will not be an issue. But when I was asked i was told I would still get the full amount if that were to happen since our company matches thru profit sharing plan and they only update it at the end of the fiscal year.

I do not think it matters if you are maxing out to $16,500, your company only matches up to a certain percentage. Let's say they match up to 6% of your contributions. If you contribute at least 6%, and are in the plan for 12 months, you get the full company match. It has nothing to do with whether or not you can reach the $16,500 limit.

Please talk to HR, you could be losing out on some money.

I did and I am contributing all year round at 25% (10% last year and 20% up till last week) so not leaving any money on the table. My company maxes up to 6% of your salary with company shares.

So it's not like I am contributing less than the 6% or for half the year so I am safe. But let's say my salary by some miracle jumps to 100K and I max my 401K by may-june (the day I have that issue ;D) my company will still match up to 6% of my salary as if I contributed for the full year instead of up till may-or june. Basically they wouldn't stop giving me the mact in may or june just because I maxed my 401k plan already.

[SVT]

So it's not really a match because the company contributes 6% no matter what? Or do you still have to participate in the plan to get the 6%?

I have a friend who works for a company that automatically contributes 10% of his salary whether he participates or not. He's making $106k, so $27,100 is being dumped into his 401k every year!

[Deleted]

Mar 6, 2011 10:40:37 GMT -5 SVT said:

So it's not really a match because the company contributes 6% no matter what? Or do you still have to participate in the plan to get the 6%?

I have a friend who works for a company that automatically contributes 10% of his salary whether he participates or not. He's making $106k, so $27,100 is being dumped into his 401k every year!

Yes and no. It is a match because some year I may get 10% or just the 6%.

It is a privately held company and they distribute stocks depending on how well the company did. So accountants comes in at the end of April (when our fiscal year ends) and we find out our numbers around september- october.

So here how it works:
-> the people that contribute to the 401K plan get their 6% match first no matter what.
-> After the ones that contribute get their 6% match, what ever is left is distributed evenly among all the employees.

So let's profits are really good once April comes around and they want to give each employee 4% of the company stock comes september - october, I would get
-> my 6% match for my 401k
-> plus the 4% they are giving to every employee.

This is another way they try to encourage employees to contribute to the 401K plan since you will get company stocks twice instead of just once. Sneaky sneaky people

[Deleted]

Mar 6, 2011 12:05:39 GMT -5 @toughtimes said:

Be careful not to have too much of your networth in a company stock. 5% max is not a bad idea. I ran into a woman who worked for The Limited at the World Trade Location during 9/11. At one shot, she was injured, lost her job and then had her savings destroyed as it was all in The Limited Stock which sank like a stone after the attack.

Don't keep all your eggs in one basket.

Only the match and what they gift to us is in company stock ... so basically not my money.

I cannot buy company stock even if I wanted to since it is privately held.

And if I were to retire or get fired/quit, they would automatically buy me out. So unless you work for the company or member of the family that owns the other 51%, you cannot have company stocks.

[Savoir Faire-Demogague in NJ]

my company will still match up to 6% of my salary as if I contributed for the full year instead of up till may-or june. Basically they wouldn't stop giving me the mact in may or june just because I maxed my 401k plan already.


Are you sure about that? Or are you just thinking they do that. You have to be contributing to your 401K in order to get the company match.
The problem with these sorts of questions is that none of us have access to the plan rules. These questions should not be posted here, but asked of your HR dept.
If you are saying your company will put 6% of your salary in the plan, whether or not you participate, then this is a different story.

[schildi]

SF,
My company will contribute even if I do not contribute at all. It's called profit sharing, similar to cawiau's companies plan from what I understand.

[Baby Fawkes]

SF, your point is good for being cautious and making sure that things are covered, but some companies make this a lot easier. In my case I work for a company where they match 6% at a 50% ratio (i.e. 3% total). They trigger the match based on what my elected deduction is, regardless of whether or not I actually have money taken out.

Throughout the year I have my contribution set high and end up maxing out around October. As long as I keep my deduction percentage in the system at 6% or higher they still deposit a match. Novermber and December only have a match go in because I have $0 deducted due to maxing out. As long as I don't change my deduction at the end of the year they'll still give me the match as if I had contributed that month. I realise this isn't how every company does it, but it sure is nice to not worry about trying to calculate things at the end of the year if bonuses are involved and aren't known values. :)

[Savoir Faire-Demogague in NJ]

My company will contribute even if I do not contribute at all. It's called profit sharing, similar to cawiau's companies plan from what I understand.

Yeah, I was thinking that this is what it was. Not a regular 401K but some other deferred compensation arrangement. I worked somewhere years ago that had a similar compensation plan.

[share88]

IIRC, if the company automatically enrolls new employees (so that you have to opt out), they can get around the whole "highly compensated" limits. But there is nothing you as an individual can to force them to change it. They are meeting IRS rules - just not in a way u prefer. Its been quite awhile since I learned that stuff, but I think I have it generally correct.