401k Percent Limit

[doah001]

I tried to bump my 401k deferral to 24% so I could max my 401k for 2006. I was told that the max percent I could allocate was 19%. Is this correct? I didn't think there was a limit except for the $15K per year. I am 29 so I don't qualify for the catch up option. Can individual companies make up their own rules for the 401k plans they provide? All input is greatly appreciated. Shenan

 

[kramer]

Companies have an upper limit, but 19% is not the highest possible. I am currently deferring 30% (I seem to recall that that might be the highest but I am unsure about this). I do this high level of deferral for the first few paychecks of the year, and then defer the minimum the rest of the year to get full matching on every check. I time it out to defer the full $15K.

I do this in case I am laid off during the year, I will have deferred the maximum possible income.

Kramer

 

[Outtahere]

I would call the company that has the 401k plan, don't count on HR knowing all the rules. It also depends on how your plan was written, ours here says you can contribute 15% up to a max of $15,000 so if for some reason taking 19% of your check gets you to that limit then they shouldn't say no.

 

[justin]

My understanding is that plan sponsors (your company) can set an upper limit that is lower than the $15000/yr that the IRS sets. For example, my wife's employer has set an upper limit of 20% of total compensation, so that she can't have more than 20% taken out of any one paycheck. If you earned $75,000 or more, then you could still make the $15000 annual contribution max.

 

[boutros]

legally a 401k sponsor can allow you to contribute up to your entire pay.  But employers are allowed to be more restrictive.  The $ amount cap still aplies

 

[SteveR]

I read somewhere in our plan that there was a limit for the "highly" paid workers due to an IRS requirement that related to the percentage of contributions from these "highly" paid workers with respect to the less highly paid ones. There is a calculation that a company has to make each year to demonstrate they are not violating this rule to keep the IRA advantages to the 401k plan. I know we are restricted to a maximum percent of income we can contribute pre-tax and post tax but my wife has no such limit. I am sure there is an IRS document on this but I don't have the time to look it up.

 

[Outtahere]

Yes that's for the "highly compensated" and usually applies to management/owners who make more than $80k ( I could be wrong about the $ amount). I believe that an HC person can only contribute 2% more than the average of the rest of the employees in the plan. It's hard to figure that number prior to the census the 401k company does so what we do here is contribute the max and then if you've gone over that limit the 401k co sends you the difference. It happened every year to me until I hit 50, then the catchup part of the contribution covered that.

 

[work4beer]

Max contributions vary. My company used to allow 10% max. Now it's 50% max. I've also been limited in occasional years as a "highly compensated employee."

 

[Andre1969]

I think my company will let you contribute up to 70% of your pay, up to the federal limit ($15,000 in 2006). I'm currently making $50K (it'll change in July, presuming I get a raise), so right now 30% of my income puts me right at $15K per year.

 

[astromeria]

My last company allowed employees to put in 60%. This was incredibly handy for me in my retirement year (2005), when I worked part time for only part of the year. I was still able to max out my 401k--thanks also to being able to take 401k contributions from my final payment for unused vacation days.

 

[justin]

My last company allowed employees to put in 60%. This was incredibly handy for me in my retirement year (2005), when I worked part time for only part of the year. I was still able to max out my 401k--thanks also to being able to take 401k contributions from my final payment for unused vacation days.

I forgot - my company has a 60% limit too. Although it doesn't affect any of our employees much, since we all make enough such that we hit the $15000 limit before hitting the 60% limit. The problem would be if you tried to contribute more than 60% in the last few months of the year to "catch up" and get the whole $15000 contributed by year-end.

Good news for us - the company VP told us yesterday they are bumping our 401k matching percentage up from 4% to 6%.

 

[astromeria]

Cool! If my husband and I had had 6% match all of our working years, we'd have double our IRA savings. I imagine a high match like that is more beneficial than most pensions--because if anything, it's front loaded (the matching funds received early have longer to grow).

 

[NinjaPigeon]

The reason they do that is because there are rules that prohibit the plan from favoring the highly compensated employees (which usually accounts for the executives). The limits are in place to keep the plan from being "top-heavy".

What's interesting is that if out of your company, nobody contributes more than 2%, then the executives can not contribute more than 4%. I forget the language of how this is worded, but a quick google will provide you with more info. This works well in the other direction though. If everyone in your company contributes a lot to the plan, you will be able to contribute a lot also. This is why the percentage varies among companies.

 

[doah001]

Everyone, thank you for the information you have provided.  I have contacted my 401k provider and they and they said they didn't think there was a limit but they would check on it and get back to me.  I have not heard back yet, but I will post what I find when I get more information. 

I don't believe I am considered a "highly compensated" employee as I make $53k a year.  Thank you again for all of your input.

Doah001