401K discrimination laws ?

[Cut-Throat]

My wife's company sent her a letter informing her that IRS - 401K laws forbid discrimination towards lower paying employees and caused them to enact some changes.

What the company did was that anyone in the company that exceeded 90K per year, instead of being able to contribute 15% of their salary, will only be allowed 10%. Up to a maximum of $14,000 whichever is less.

Well, what this means is that anyone who is paid 140K or more per year, will not be hurt at all, as 10% of 140K is the $14K maximum amount. However if you are at the 90K level, the maximum contribution to the 401K is now back to $9,000. We were looking forward to putting an extra $1K in 2005, but now it looks like we're back to $9K

I have heard that 401K plans have to be somewhat equitable, but this one smells really bad to me as the only people it hurts are between $90K - $140K per year. Top executives are again let off the hook!

Does anyone here know any details on this? - This is a Fortune 500 company, so I'm sure they checked the legalities on this, but this really smells foul to me!

 

[JOhn Galt]

Why Cut-Throat, it is just your government trying to
be fair to all and not hurt anyone's feelings

JG

 

[Cut-Throat]

Why Cut-Throat, it is just your government trying to
be fair to all and not hurt anyone's feelings  

JG

No, what you don't understand. This is the company that did this! The government has actually increased the allowable 401K deduction to 14K this year.

 

[Martha]

CT, what I understand about discrimination testing is that the percentage contributions of highly compensated employees are compared to the percentage contributed by other employees. Highly compensated employees are those who are paid over $90,000 plus people who own a certain ownership interest in the company. I won't be able to give you the formulas and maybe someone can, but by way of example, if the highly compensated employees are contributing 15% up to the maximum contriubtion but the other employees are contributing only 2%, the company might flunk discrimation testing and the highly compensated have to reduce their percentage.

We had this problem at our firm and fixed it by making fairly significant employer contributions to all employees. This allowed us to contribute the maximum to our 401(k) for the highly compensated.

 

[JOhn Galt]

Who writes the laws and rules on this stuff? You implied yourself that a Fortune 500 company has probably researched the hell out of it. Anyway, this is what usually happens when you have laws to make things more "equal" or more "fair". Take affirmative action laws for example.
An abomination! Someone will always get screwed and that
"someone" might be you.

JG

 

[John Galt]

And another thing............"discrimination testing"
is BS. It's pure leftist socialist commie groupthink.
Apologies to Martha as I know some attorneys make big money on this stuff, and......................... I am all for making money

JG

 

[Cut-Throat]

John,

What you don't understand is that your life is product of our government.

You like to say you made it on your own, but you were publicly educated (or at least they tried). Your food and drugs have been inspected by the FDA your whole life. Everytime you drive in your car, you are using public infrastructure that would not have been possible without the government.

You use the government everyday of your life. You just have your blinders on.

 

[Martha]

Here is a little more guidance that might help:

The test is as follows: the average contributions of highly compensated employees, as a group, cannot exceed the average contributions of nonhighly compensated employees, as a group, by more than about 2 percent. (Age-50 catch-up contributions are not included in discrimination testing.) If the HCEs exceed this threshold and the employer fails to correct the imbalance, the plan could lose its tax-qualified status and all contributions and earnings would have to be distributed to all plan participants. In addition to the 2 percent spread, the contributions of all HCEs as a group may not be more than two times the percentage of other employees' contributions.

Consequently, HCE contribution levels are based on the contributions of non-HCEs. By setting up this carrot-and-stick system, Congress made it in the best interest of highly compensated employees to encourage non-HCEs to contribute to the plan.

If HCEs contribute too much, an employer can choose among several strategies to bring its plan in compliance with the law. Here are some of the most common:

First, an employer may set a percent-of-pay limit within the plan document that HCE contributions may not exceed. The advantage of this strategy is that it removes all doubt about whether a plan will pass its test. The disadvantage is that HCEs could miss out on savings opportunities if the cap ends up being lower than necessary.

Second, an employer may restrict HCE contributions when they reach the maximum allowed by the test. In this case, the employer often runs discrimination test projections in the middle of the year, looking for signs that contribution rates will become unbalanced. The advantage of this strategy is that HCEs will be able to contribute the most allowed given the constraints affecting their plan.

Running the test midyear can also show if HCEs can be allowed to increase their contributions above the set percentage limit (if non-HCEs are contributing more than expected, for example).

Third, an employer may choose to refund excess contributions after determining at year-end how much needs to be refunded. Companies using this strategy generally notify their HCEs early on that a refund is likely.

 

[Cut-Throat]

Thanks Martha!

 

[MJ]

John, if it hadn't been for the forced contribution to the government SS fund, you probaby would have spend the extra few dollars (another dinner or bottle of wine) and would not have had the opportunity to look forward to receive, by your own admittance, the needed SS monthly checks in the near future. :-/

Damn those social self centered democratics!

The ironic thing is, that I, as a "frugal" liberal, would have benefitted more than you by not having this forced contribution as I would have put away those extra dollars for future growth. But I am grateful that the net is there for me and even for you.

MJ

 

[JOhn Galt]

I agree that my life (in a perverse way) is a "product of the government" to use Cut-Throat's phrasing, and I acknowledge that my retirement would be in deep doo-doo without social security. But isn't this really my money and my employer's money coming back to me?
In fact, isn't whatever the government spends the result
of taxes on the labors of the citizens? Government merely taxes, spends and redistributes wealth. I'm not
saying everything the government does is bad, nor am I
suggesting we can get along without government.
I am predicting the destruction of truly free enterprise and the removal of incentives for entreprenuers to build
and innovate. I don't know when this will be complete,
but we are well down the road and I see no signs whatsoever of any slackening in the slide into
leftist PC nonsense. Affirmative action is but one
example.

JG

 

[lauraf13]

No, what you don't understand. This is the company that did this! The government has actually increased the allowable 401K deduction to 14K this year.

Actually it is a government (IRS) rule that the company has to follow. We had the same thing at our company. I was finally able to contribute the max after our company was bought out and the money from the buy out of the ESOP stock was put in the 401K. This gave all employees a 401K balance.

Laura

 

[johnblake]

This is why 401Ks are bad and why I support Bush's proposals for more tax deferred savings options.

Why should someone who works for a co. that has a 401K be able to sock away $14,000 tax deferred, while another person can only save $3-4K? It makes no sense to have the government offer programs through companies. It's bad for the citizens, and bad for the company (who has to manage the plan). It does however line the pockets of the financial companies that offer these plans.

What if the government offered a simple program that allowed people to save tax deferred? No 401Ks, SEP, , and all the other complicated programs. Simple, easy, inexpensive, with financial institutions competing for your business.

 

[Cut-Throat]

Actually it is a government (IRS) rule that the company has to follow. We had the same thing at our company. I was finally able to contribute the max after our company was bought out and the money from the buy out of the ESOP stock was put in the 401K. This gave all employees a 401K balance.

Laura

I understand that the company has to follow the rule. The problem that I had with it, was the way the company chose to implement it. As Martha said there are a few different options to stay within the guidelines.

 

[Bob_Smith]

Why should someone who works for a co. that has a 401K be able to sock away $14,000 tax deferred, while another person can only save $3-4K?  It makes no sense to have the government offer programs through companies.

I agree with JohnBlake - and not only for retirement plans. Get health insurance out of the employment relationship too.

 

[sgeeeee]

I agree with JohnBlake - and not only for retirement plans. Get health insurance out of the employment relationship too.

I agree with the sentiment. But my fear is that we are actually moving the other direction . . . so that no one will have these opportunities.