401(k) and Bonus Check

[davidbeitz]

Are here any advantages to: skipping my 401(k) contribution, keeping the percentage keeping it the same, or increasing it when receiving my bonus check?

Thanks in advance

 

[exnavynuke]

What impact will the bonus check have on your contributions for the year would be the first question I can think of?

My 401k plan is set up such that once I max out my contributions I automatically stop contributing. That's great, except if I max out and stop contributing for the rest of the year then my employer match becomes zero (50% of $0 is $0 as is 100% of $0). So for me, my primary concern when getting "extra pay" (I get OT, but not bonuses) is to ensure that I adjust my contribution rate such that I max out my contributions as close to the last week of the year as possible in order to get the maximum company match I can.

That's the only potential concern I can see, assuming you will max out your contribution in general.

 

[Mdlerth]

My 401k plan is set up such that once I max out my contributions I automatically stop contributing. That's great, except if I max out and stop contributing for the rest of the year then my employer match becomes zero (50% of $0 is $0 as is 100% of $0). So for me, my primary concern when getting "extra pay" (I get OT, but not bonuses) is to ensure that I adjust my contribution rate such that I max out my contributions as close to the last week of the year as possible in order to get the maximum company match I can.

Could you develop this point a little further? There must be some subtlety in the match rules that goes over my head.

For example, suppose you earn 96k per year, or 8k per month. You are over 50 so you are allowed to put up to 24k per year into the 401k, which is 25%.

Let's say the company matches, dollar for dollar, the first 6% of your pay that you save. That would be 5,760 (=6% x 96,000) per year.

If you saved only 6%, evenly spread through the year, you put in 480 the first month (=5,760/12) and the company puts in 480. Over twelve months, your 401k would get the full 5,760 company match.

If you saved the 24k max, evenly spread through the year, you put in 2000 the first month (=96,000/12). Does the company still put in only 480 that month? You still get the full 5,760 company match, but it would still take the full twelve months.

In the extreme case, you save the 24k max as quickly as possible. You put in all 8,000 for the first three months, getting to your 24k limit in the shortest possible time. Does the company only put in 480 each month, so that after three months you would garner 1,440 worth of matches but then that's it for the year?

Does my example describe your situation? This is puzzling. It differs from what I thought I understood about 401k matches based on a post from another forum member named Senator who retired last year. Knowing he was going to retire mid-year, he accelerated his 401k deductions so as to cop a full year's company match before leaving in July. Maybe how the match gets deposited varies by employer, but in my ignorance I thought the rules were defined by the IRS so they'd be uniform for when the revenooers come auditing.



P.S. Dear Senator, if you're still out there listening, could you please tell me if I captured your strategy correctly?

 

[REWahoo]

Knowing he was going to retire mid-year, he accelerated his 401k deductions so as to cop a full year's company match before leaving in July. Maybe how the match gets deposited varies by employer...

Yes, it does vary by employer.

The company I worked for would not allow front loading the company match, limiting the amount they would contribute each month to 1/12 the maximum your salary would allow.

 

[exnavynuke]

How the match is done varies based on the employer. Mine does the "match" based on each paycheck. If you're putting money into the 401k that paycheck, they match 100% for the first 3% you put in and 50% of the next 3% you put in. If I put in 50% of my pay then I'd reach my max contribution sometime in the first 3 months of the year and I couldn't put anything in after that. So for those first 3 months, my employer would be putting in 4.5% of my pay, but after I stopped contributing (because I hit the match) then their contributions would also stop.

As such, I have to set my contribution % so that it "should" keep me from maxing out too early and adjust it in the latter part of the year to try and make sure I get that 4.5% match every paycheck.

Simple numbers at 18k max contribution, 100% match up to 6%, and 150k income paid monthly (for ease of math).

IF I put in 10% each month, I'd put in 1,500 per month for an exact 18k/year. During that time, for each paycheck my company would contribute 6% or $750/month and a total of $9,000 on the year.

IF I put in 20% each month, I'd put in 3,000 per month for an exact 18k after 6 month. During those 6 months I'm contributing to the 401k my employer would match that same 6% for $750 each month for the first 6 months for a total of $4,500 over those 6 months. As my contribution to the 401k for the last 6 months would then be $0, my company's match for those 6 months would also be $0 (as my contribution percentage would be 0%). Thus, I'd still put in $18k, but the company would only put in $4,500 total for the year.

 

[exnavynuke]

Some employers, as I understand it, match "dollar for dollar" UP TO a maximum % of your annual pay without a "cap" on the amount per paycheck being matched. That's probably what Senator's did.

There are advantages to each system imo. Mine, for instance, works well for those of us with variable paychecks. I have a "salary" but am not exempt from OT so when I work 60 hours instead of 40 I get paid overtime. On those weeks, the value of the company match is higher because my pay is higher. So when I earn $40k in overtime in a year, I get an extra $1,800 in company match because they match 4.5% of my "total" pay (including OT) and not just my salary. The downside is I have to contribute all year to get the full match.

 

[Mdlerth]

Thank you for the prompt clarifications. My megacorp's rulebook says I can save up to 90% of my pay into a 401k subject to IRS limits, so I guess I could still employ the Senator strategy. Clearly, however, it's different from employer to employer.

Also, I apologize for not proofreadinging my earlier letter. I wrote that 2k was equal to 96000/12. I must be getting old. Maybe I should retire!

 

[LOL!]

Are here any advantages to: skipping my 401(k) contribution, keeping the percentage keeping it the same, or increasing it when receiving my bonus check?

Thanks in advance

Others probably said this, but it bears repeating:

My spouse's 401(k) does a match per paycheck. One year the bonus check in December made her hit the annual limit on 401(k) contributions, thus she was not able to contribute for the last paycheck of the year at the end of December and missed out on a 3% match of the last paycheck.

It actually takes some work to get the mostest match from her company AND hit the max annual contribution limit because one must leave enough room to get the match on the last paycheck, but not too much room such that if the bonus check in mid-December is low that even contributing 100% of the last paycheck will not reach the max annual contribution limit.

Thus, it all depends on whether your employer does something called a "true up" after the end of the year. My spouse's employer does not do a true up.

 

[Jerry1]

During my tenure with my company, co-workers discussed the per check matching issue and made a point to spread their contributions out throughout the year. Later on in my time with the company, two things happened - I started making more money and I started maxing out my 401k. I'm not sure of the math but I calculated once and figured out that at my salary and with maxing out the 401k, it did not matter when the money went in. Either way, the amount the employer would match was the same. Whatever the case, the OP is right to consider the outcome of making contributions on the company match and act accordingly.

 

[youbet]

Many companies do a make-up match during the first quarter of the subsequent year. Say you max out ($18.5k) by the end of Sept so you get less than the full year's match. In the first quarter a calculation is done and you're credited the difference between the match you got and what you would have gotten if your contributions had been made evenly over all 12 months. You wind up with the full percentage (whatever yours is) match of $18.5k. That's how it worked at my MegaCorp and at the MegaCorp my son is working for now.

I thought they all worked that way. Apparently not.

 

[RetireAge50]

My employer matched the first 6% per month. So it was important not to reach $24,000 before the last paycheck in December. One year I screwed it up and thought I was going to not get the match but then realized I could contribute to the after tax bucket (beyond the $24,000) and still get the match.

 

[Al18]

My bonus comes near the end of the calendar year, and I've been maxing out the 401K for the past few years. My 401K payments are spread out evenly throughout the year, but I put in about 1% more during the first 10 1/2 months and then decrease it to 5% less for the later part of November and all of December. This gives me a larger bonus check and sometimes my final paycheck is larger - as I hit the 401K limit.

 

[bUU]

Are here any advantages to: skipping my 401(k) contribution, keeping the percentage keeping it the same, or increasing it when receiving my bonus check?

Neither my spouse nor I have such specific control over when 401(k) contributions are taken out, and unfortunately they do take out 401(k) contributions for bonuses. For my spouse, that's not a big deal. That happens in February, and raises come in March, so I can adjust future contributions up or down as necessary to account for those changes. Beyond that, my spouse's employer will readjust company matching contributions - if you reach the 401(k) contribution limit before the end of the year, they'll effectively treat some of your earlier, excess contributions as late-in-the-year contributions, and match them after the new year.

For me, it is an issue. My bonus comes in October and my raise in November. Last year, the bonus was so unexpectedly large (yes - I know - a good problem to have) that no change to my 401(k) contribution percentage would prevent me from missing out on some company matching. And, they don't readjust contributions to make up for that.

If I had a choice, I would exclude bonuses from 401(k) contributions. That way, I could much more predictably set a 401(k) contribution percentage that will allow me to capitalize on my full company match potential.

Of course, this year it is academic: I'm HCE and my (humongous company) 401(k) is not safe harbor, so I'm capped, anyway, and won't be able to get near the annual limit.

 

[Backpacker]

bUU - I too was HCE, but the first year I hit that the company started a 457 deferred compensation plan. I was capped in the 401k at 6%, but luckily that was also the maximum employer contribution. I just shifted excess to the deferred compensation plan. They don't have any goofy timing rules on the match. The year I was downshifting I knew I'd be kicked out of the 457 club, so maxed out the 457 in the first 4 months. For 2017 I am back to below HCE level and am able to tuck away 25% in the 401k, still with 6% max employer match.

 

[Cobra9777]

My former Megacorp continued to make matching contributions each pay period (at the specified % of pay) as long as warranted by YTD employee contributions. No employee contribution was required for a specific pay period in order to get the match. They would not front-load the match for bonuses, etc, but if you terminated mid-year, you received a true-up matching contribution in the final pay period. This happened when I retired. Basically, timing of the contributions didn't matter; the match was spread equally across the year until it was no longer warranted by YTD employee contributions, with a true-up if necessary at year-end or at termination.

I typically received an annual bonus in February. Some years I reduced the 401K contribution % ahead of the bonus, just to maximize the net pay of the bonus check, and then increased the % immediately after. Other years, if I wanted the money invested sooner, I would leave the % high and max-out very early in the year, which resulted in higher net pay for the remainder of the year. For me, it was just a cashflow timing decision; the company match was always there in full by year-end.

For companies that don't work that way, I doubt that they limit the match as an intentional policy. It's probably just outdated systems and interfaces between company payroll and the plan administrator. Fixing it is likely very low priority because it affects so few employees and those employees do have a workaround. But obviously, it is extremely important that you understand how your company handles this to ensure you get the match you are entitled to.

 

[bUU]

For companies that don't work that way, I doubt that they limit the match as an intentional policy. It's probably just outdated systems and interfaces between company payroll and the plan administrator.

Perhaps, but given that they don't do what's necessary to satisfy Safe Harbor, there is reason to suspect intentionally undercutting the benefit, without making it completely obvious that they're doing so.

 

[youbet]

Perhaps, but given that they don't do what's necessary to satisfy Safe Harbor, there is reason to suspect intentionally undercutting the benefit, without making it completely obvious that they're doing so.

It's a shame your employer treats you in such a horrible manner! With so many other employers who don't use those unsavory tactics, why aren't you moving on down the road to a more favorable situation?

 

[LOL!]

For companies that don't work that way, I doubt that they limit the match as an intentional policy. It's probably just outdated systems and interfaces between company payroll and the plan administrator.

That's probably true. I was on a corporate 401(k) committee. It was like pulling teeth to get a "true up" added, but success finally came and was retroactive one year. A little lobbying of the C-level suite was necessary because only a handful of employees contributed to the max level before the last paycheck and were affected. Most of the affected employees had no idea they were getting stiffed.

For those that say they wouldn't want a 401(k) contribution to be taken from bonus checks, if they worked for my spouse's company that would be like saying "I don't want a tax-free 3% added to my bonus check."

 

[euro]

Yes, it does vary by employer.

The company I worked for would not allow front loading the company match, limiting the amount they would contribute each month to 1/12 the maximum your salary would allow.

Mine did that too - I think it is very common, so OP, pay close attention!

 

[bUU]

It's a shame your employer treats you in such a horrible manner! With so many other employers who don't use those unsavory tactics, why aren't you moving on down the road to a more favorable situation?

Because I'm an old person with expectations and employers would prefer to hire kids and H-1Bs, who they can pay peanuts rather than matching my HCE salary.

Oh, and did you miss the part where I said I was HCE? The fact that they pay so many kids and H-1Bs so little that they cannot afford to contribute to the 401(k), that's what makes being HCE an issue.

 

[youbet]

Because I'm an old person with expectations and employers would prefer to hire kids and H-1Bs, who they can pay peanuts rather than matching my HCE salary.

Oh, and did you miss the part where I said I was HCE? The fact that they pay so many kids and H-1Bs so little that they cannot afford to contribute to the 401(k), that's what makes being HCE an issue.

Your situation is 100% of your own making. If you don't like your employer or the way things are, snatch something else. You're not at all stuck where you are. You're there by choice.

 

[Johanson]

I used to change my contributions based on expected overtime but I discovered that payroll didn't keep up with the changes so when I did increase the contribution, it might not hit for 2 paychecks. I would do this with the expectation that a much larger pay period earnings would change the withholding rate so a counter higher 401K contribution would not only lower the withholding rate, the increased withholding would still leave me more take home due making more money.

Regarding maxing out one's 401K and losing the company match, that all depends on your employer. Mine switches a person's contributions to After Tax after hitting the max. This is directly from my plan's contributions page:

"Contribution changes will take effect on the next available payroll period following your election.
Once you reach the IRS contribution limit for the current year ($18,000), both your before-tax and Roth 401(k) contribution elections will automatically default to after-tax contributions for the remainder of the year unless you elect otherwise via the IRS Contribution Limit page."

And the following is from the above mentioned page:

"The following is a summary of your options once you reach the IRS contribution limit:
1. Change all before-tax and Roth 401(k) contribution elections to after-tax, up to the Plan
maximum (default)
The change to after-tax will occur in the same paycheck in which you reach the IRS limit
You will maintain your total contribution level and company matching contribution
2. Change all before-tax and Roth 401(k) contribution elections to after-tax, up to the amount
required to maintain the maximum company match contributions
The change to after-tax will occur in the paycheck following the paycheck in which you reach the IRS limit
You potentially may not maintain your total contribution level and maximum company match contribution
You will not be able to make up any missed employee and company matching contributions in a later paycheck
3. Cancel all before-tax and Roth 401(k) contribution elections
You will not maintain your total contribution level and maximum company contribution
You will not be able to make up any missed employee and company matching contributions in a later paycheck
"

 

[bUU]

Your situation is 100% of your own making. If you don't like your employer or the way things are, snatch something else. You're not at all stuck where you are. You're there by choice.

I never said anything to the contrary. You seem to be replying to a lot of things that neither I nor anyone else in this thread has said. Nothing about my situation mitigates the fact that they don't offer a safe harbor plan. Nothing about my situation mitigates the fact that it will affect my options and have a detrimental effect on my co-workers. Let's stick to discussing the things that people are actually talking about instead of going off on strange and Wild tangents.

 

[youbet]

I never said anything to the contrary.

Good. When you were talking about lower paid H1b visa folks, etc., I must have misinterpreted what you were saying.

 

[bUU]

When you were talking about lower paid H1b visa folks, etc., I must have misinterpreted what you were saying.

Must have. With that comment, I was answering your specific question - nothing more.