penalities for being "highly" compensated

[myself]

I think you are correct Independent. Almost everyone "thinks" they are middle class. However depending upon which definition you look at, the limits for what "middle class" is and is not, are wildly conflicting. I saw one chart that showed anyone making over 70k / yr is considered upper class. Others say over 100k. Why do so many people get the idea that somehow people that make more money than they do, are "taking" that money away from them? That is the "thinking" behind highly compensated earners not being allowed to save more. It is somehow believed that if we were all more "equal" then everything would be ok.... complete craziness....

I think the definition of each of the "classes" would be the way income is broken down into quintiles (fifths).
Lower class = first quintile
lower middle class = second quintile
middle class = third quintile
upper middle class fourth quintile
uppler class = fifth quintile
According to the census bureau that breaks down like this for 2006. (Historical Income Tables - Households)
Lower = less than $20,035
lower middle = $20,035 to $37,774
middle = $37,774 to $60,000
upper middle = $60,000 to $97,032
upper = greater than $97,032

Further breakdowns by race are here: Historical Income Inequality Tables

 

[Maurice]

It depends on the ranges of salaries present in your firm. The idea was to prevent 401(k)s from being an executive perk only.

At my investement bank, you can make 10MM per year and still be allowed to max out your 401(k). I have a buddy at Bank of America, they are limited in the amount they can contribute because the company has a huge pink-collar employee base that make so little money.

So DHs problem isn't that he's 'highly compensated', its that he works in a firm with many others who are poorly compensated.

 

[vinnieg24]

i never heard of that before. I will have to look into this

 

[Independent]

I think the definition of each of the "classes" would be the way income is broken down into quintiles (fifths).
Lower class = first quintile
lower middle class = second quintile
middle class = third quintile
upper middle class fourth quintile
uppler class = fifth quintile
According to the census bureau that breaks down like this for 2006. (Historical Income Tables - Households)
Lower = less than $20,035
lower middle = $20,035 to $37,774
middle = $37,774 to $60,000
upper middle = $60,000 to $97,032
upper = greater than $97,032

Further breakdowns by race are here: Historical Income Inequality Tables

My comment was that less than 10% of full-time year-round workers earn over 100k. Your numbers show that about 20% of households have total incomes over $97k. The difference, of course, is multiple workers and investment income.

I think that whether you look at household income or individual worker earnings, it's easy for people in the "higher" group (I'm one of them) to overlook the fact that we are "higher".
Some people, however, would define "class" as an attitude, not a specific dollar amount of income. Maybe "You're 'middle class' if you have to work for your money, and you're 'rich' if you can let your money work for you."

 

[Marquette]

Thanks Martha! That really shed light on a lot of things... I'm guessing our company might have a safe harbor 401k. They match 100% up to 6% and then gift back whatever we don't spend on health care (so if we budgeted $4.5mm and spend $4mm, they gift $500k back into the 401k plan).

And here I just thought it was because there were fewer low earners at my new company.

edit: I think it's hard for some of us to think about if we're upper class, middle class, whatever. When you live below your means, more money translates to more savings and not necessarily a fancier car. Our breakthrough was realizing that, while I make 5x what my dad makes, he and my mom were doing a better job of saving and investing than I was. So, my wife and I are now trying to live like they do.

 

[myself]

My comment was that less than 10% of full-time year-round workers earn over 100k. Your numbers show that about 20% of households have total incomes over $97k. The difference, of course, is multiple workers and investment income.

I think that whether you look at household income or individual worker earnings, it's easy for people in the "higher" group (I'm one of them) to overlook the fact that we are "higher".
Some people, however, would define "class" as an attitude, not a specific dollar amount of income. Maybe "You're 'middle class' if you have to work for your money, and you're 'rich' if you can let your money work for you."

Well, those aren't my numbers. They're from the feds.

Here's an interesting one from the feds as well: Historical Income Tables - People
Which only goes up to 2005, but it's based on "per capita". And it shows that the 2005 per capita income was $25,036.

I agree, in general. "Class" is somewhat attitude, however, folks who overspend because they think they can, can/will always feel like lower or lower middle class, simply because "the man" is keeping them down.

 

[Independent]

.... Why do so many people get the idea that somehow people that make more money than they do, are "taking" that money away from them?

That is the "thinking" behind highly compensated earners not being allowed to save more. It is somehow believed that if we were all more "equal" then everything would be ok.... complete craziness....

I guess you read or hear different stuff than I do. It seems to me that the idea that higher income people are "taking" from the lower is usually directed at the extremely high level decision makers. For example, the CEO who collected millions in stock options because he outsourced a bunch of jobs. I've been in that top 10% earnings and never felt that anyone thought I was "taking" money from them.

I have a reaction (maybe over reaction) to your wording about highly compensated "not being allowed" to save more. The gov't doesn't tell us that we can't save more. It simply isn't giving us this particular tax break if we do. More correctly in the 401k situation, it's not giving us a tax break if there is something about our 401k plan that results in only the high income people using it.

I think the underlying problem is that we think the gov't is supposed to "reward" us with tax breaks whenever we do the "right" thing (get a mortgage, live in a high tax state, contribute to charity, save for retirement, etc.). I think that's a silly idea. I'd be happier eliminating all these "tax breaks" and replacing them with lower base rates.

 

[bssc]

My wife had this happen to her last year. No tax rebates for us either.

 

[armor99]

I guess you read or hear different stuff than I do. It seems to me that the idea that higher income people are "taking" from the lower is usually directed at the extremely high level decision makers. For example, the CEO who collected millions in stock options because he outsourced a bunch of jobs. I've been in that top 10% earnings and never felt that anyone thought I was "taking" money from them.

I have a reaction (maybe over reaction) to your wording about highly compensated "not being allowed" to save more. The gov't doesn't tell us that we can't save more. It simply isn't giving us this particular tax break if we do. More correctly in the 401k situation, it's not giving us a tax break if there is something about our 401k plan that results in only the high income people using it.

I think the underlying problem is that we think the gov't is supposed to "reward" us with tax breaks whenever we do the "right" thing (get a mortgage, live in a high tax state, contribute to charity, save for retirement, etc.). I think that's a silly idea. I'd be happier eliminating all these "tax breaks" and replacing them with lower base rates.

You have a good point there. Rather than attaching all sorts of loopholes to tax rates that are too high.... create a lower one, that everyone pays...
I am not quite in that top 10%, I suspect I will be there in 5 years though. I believe as you do... that to get thre I have not taken away any earning power away from anyone else to do it. But you would be amazed how many I have heard say otherwise.

 

[jazz4cash]

The "thinking" behind the discrimination testing is that management must make the plan attractive to lower paid workers in order for everyone to benefit. Otherwise its just another executive compensation plan and there are plenty of other ways to do that. The easiest way to encourage lower paid workers to contribute more is to increase the match, adverstise the plan and educate the folks that aren't contributing more. The limit for contributions from all sources is 45k, so employers could match 200% if they chose, or switch to a safe harbor plan.

 

[SteveR]

My last employer did not have a safe harbor. Every year I was there I would get a letter in Feb. saying don't do your taxes quite yet.....we failed the 401k test...again so sit on your hands for 2 months while the bean counters figure out what went wrong...again.

Last year we lost it big time and had to "take back" some of the money we put into the plan. I was maxed out plus the over 50 incremental so that hurt! Hard to believe a company with $2B in sales can't figure out who is paying what to whom in a 401k plan. Glad I finally walked away last year.

 

[Rambler]

Some days, I tell ya, I'm ready to walk too, but the FI part is not quite there yet...couple years +/- to go.

I can't even participate in our 401k...my limit is a big fat "0", and it has been that way for over 10 years, even before I gained exec type status. In hindsight though, its not too bad: we do have a 401k replacement plan for HCEs to which MegaC matches dollar for dollar up to 6%, and not having a 401k kind of forces me to put money in a taxable account, making the RE part of FIRE an administratively easier proposition.

R

 

[vinnieg24]

quick question, is it law that companies must match a 401k plan if offered? I heard this somewhere but my company doesn't offer a matching 401k plan

 

[youbet]

quick question, is it law that companies must match a 401k plan if offered? I heard this somewhere but my company doesn't offer a matching 401k plan

No

 

[Spanky]

Virtually all working people the the US consider themselves "middle class". But some of us really do have higher incomes than others.
According the the Census Bureau, less than 10% of people who worked full time for "50 weeks or more" in 2006 made more than $100k.

So it's time for a pat on the back, he really is one of those "high earners".

PINC-05--Part 1

It really depends on location. In Silicon Valley or New York City, $100K is not a high salary.

 

[Darryl]

Believe $100,000 is the cutoff but I read $105,000 somewhere else maxed out at less than $10,000 this year so I will get back a check for the overage. If we can get folks under that threshold to contribute more money and or at a higher rate of participation the number will move up for the folks over the threshold. Notmuchlongers spouse sounds like they have a good participation among all participants.
Before Ben & Jerry's sold their company (yes the ice cream) they used to have a management pay plan with various collars on it. (All fake #'s here) but for example the president cannot make more than 20 times the wage of the lowest paid employee, the VP no more than 15 times etc. etc... I was watching some sort of documentary on them and I believe it was the Marketing VP was having kittens because he was making so much less than his peers in the industry and they just told him well you can always change companies or you can devise a better marketing effort that will improve the companies performance so we can pay the lowest guy more which will allow your salary to increase. Kind of reminds me of the 401k rules.

 

[Spanky]

The limit for contributions from all sources is 45k, so employers could match 200% if they chose,

200% ? Why should they?

 

[armor99]

Before Ben & Jerry's sold their company (yes the ice cream) they used to have a management pay plan with various collars on it. (All fake #'s here) but for example the president cannot make more than 20 times the wage of the lowest paid employee, the VP no more than 15 times etc. etc... I was watching some sort of documentary on them and I believe it was the Marketing VP was having kittens because he was making so much less than his peers in the industry and they just told him well you can always change companies or you can devise a better marketing effort that will improve the companies performance so we can pay the lowest guy more which will allow your salary to increase.

Some people may agree.... others may not, but the above sort of thinking makes me ill. I would never want to work in a company where my personal success or failure (salary wise) was determined by what other folks were making. I believe that everyone should be free to determine their own salaries. It is generally in the companies best interest to get someone working for them for the lowest salary possible, and it is in the workers best interest to attempt to get the highest salary possible. You trade 40 (or more) hours a week of your labor for a paycheck. Either party is free to terminate that agreement at any time, if either side thinks they can get a better deal. Believe it or not.... this is also why I am against the concept of the minimum wage law. It has been my experience that more often than not, employers tend to use the minimum wage law as a price fixing tool against lower skilled employees. As in...."why should I pay you any more than minimum wage reguarless of how good your performance is?" Minimum wage also does not encourage lower paid workers to strive for excellence, as there is no reward for it. Take off these sorts of constraints and better quality workers will get paid more, and lesser quality workers will get paid less... as they should be.