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Author: C2Reed Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75381  
Subject: 401(k) Article Date: 4/25/2001 11:11 AM
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There is a 401(k)gotcha! that isn't related to the law but rather to how fast highly compensated employees contribute to the plan. It cheats employees out of part of the matching contribution that they would have otherwise gotten had they contributed at a lower rate.

In a nutshell, it works like this: If a highly compensated employee (e.g. $104,000 annually) chooses to contribute at a rate of 15% per pay period, they will reach the $10,500 legal limit after the 17th pay period out of 26, after which they will no longer contribute. Their match of dollar for dollar up to 3% of pay will amount to $2,160, and they will have missed out on the 3% match for the last 8 pay periods of the year.


Pay Period 15 Percent 3% Co. 10 Percent 3% Co.
Match Pay Amount 401(k) Match 401(k)

1 $4,000 $600 $120 400 $120
2 $4,000 $600 $120 400 $120
3 $4,000 $600 $120 400 $120
4 $4,000 $600 $120 400 $120
5 $4,000 $600 $120 400 $120
6 $4,000 $600 $120 400 $120
7 $4,000 $600 $120 400 $120
8 $4,000 $600 $120 400 $120
9 $4,000 $600 $120 400 $120
10 $4,000 $600 $120 400 $120
11 $4,000 $600 $120 400 $120
12 $4,000 $600 $120 400 $120
13 $4,000 $600 $120 400 $120
14 $4,000 $600 $120 400 $120
15 $4,000 $600 $120 400 $120
16 $4,000 $600 $120 400 $120
17 $4,000 $600 $120 400 $120
18 $4,000 $300 $120 400 $120
19 $4,000 400 $120
20 $4,000 400 $120
21 $4,000 400 $120
22 $4,000 400 $120
23 $4,000 400 $120
24 $4,000 400 $120
25 $4,000 400 $120
26 $4,000 $- $- 400 $120

$10,500 $2,160 $10,400 $3,120
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Author: C2Reed Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29297 of 75381
Subject: Re: 401(k) Article Date: 4/25/2001 11:22 AM
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I'm sorry, I hit the wrong button before I was finished.

There is a 401(k)gotcha! that isn't related to the law but rather to how fast highly compensated employees contribute to the plan. It cheats employees out of part of the matching contribution that they would have otherwise gotten had they contributed at a lower rate. 

In a nutshell, it works like this: If a highly compensated employee (e.g. $104,000 annually) chooses to contribute at a rate of 15% per pay period, they will reach the $10,500 legal limit after the 17th pay period out of 26, after which they will no longer contribute. Their match of dollar for dollar up to 3% of pay will amount to $2,160, and they will have missed out on the 3% match for the last 8 pay periods of the year.

If instead the employee contributes at a rate of 10% per pay, they will wind up contributing $10,400 of their own money, but pick up the extra 8 periods of company match, which will equal $3,120 for a total contribution to their 401(k) of $13,520 instead of $12,660 in the example above.

I realize the chart below (which I must say looked excellent in Excel)is messed up but I don't know how to fix it, but the numbers work out.

Pay Period 15 Percent 3% Co. 10 Percent 3% Co.
Match Pay Amount 401(k) Match 401(k) 

1  $4,000 $600 $120 400 $120 
2  $4,000 $600 $120 400 $120 
3  $4,000 $600 $120 400 $120 
4  $4,000 $600 $120 400 $120 
5  $4,000 $600 $120 400 $120 
6  $4,000 $600 $120 400 $120 
7  $4,000 $600 $120 400 $120 
8  $4,000 $600 $120 400 $120 
9  $4,000 $600 $120 400 $120 
10 $4,000 $600 $120 400 $120 
11 $4,000 $600 $120 400 $120 
12 $4,000 $600 $120 400 $120 
13 $4,000 $600 $120 400 $120 
14 $4,000 $600 $120 400 $120 
15 $4,000 $600 $120 400 $120 
16 $4,000 $600 $120 400 $120 
17 $4,000 $600 $120 400 $120 
18 $4,000 $300 $120 400 $120 
19 $4,000 
20 $4,000 400 $120 
21 $4,000 400 $120 
22 $4,000 400 $120 
23 $4,000 400 $120 
24 $4,000 400 $120 
25 $4,000 400 $120 
26 $4,000 $- $- 400 $120 

$10,500 $2,160 $10,400 $3,120 


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Author: thehendrys Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29299 of 75381
Subject: Re: 401(k) Article Date: 4/25/2001 11:30 AM
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Now I'm confused...

I thought $10,500 was the max that You PLUS Employer Mathches could be.

So in this case, it would be pay period 14 where the Employee is Maxed out.

Which is correct?
1) $10,500 is the Max a person can contribute (not counting Employer matches)
2) $10,500 is the Max a person's contributions plus Employer matches can be.

If it #1, then I need to rework my contribution percentage. I thought I could only contribute $10,500 if my Employer was not matching anything.

Anyone know the answer?

Thanks.
the hendrys

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Author: PMcMullenCT Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29301 of 75381
Subject: Re: 401(k) Article Date: 4/25/2001 11:47 AM
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There is a 401(k)gotcha! that isn't related to the law but rather to how fast highly compensated employees contribute to the plan. It cheats employees out of part of the matching contribution that they would have otherwise gotten had they contributed at a lower rate.

It's a bit hard to have too much sympathy for those who fail to see this. As "highly compensated" as they are, one would expect they'd be able to do the math.

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Author: thehendrys Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29302 of 75381
Subject: Re: 401(k) Article Date: 4/25/2001 11:48 AM
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I'll answer my own question... (Your example was correct).

http://boards.fool.com/Message.asp?mid=14613952

You may contribute up to $10,500 as long as your contribution plus your Employer match does not exceed 15% of your income.

Good luck, all
the hendrys

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29303 of 75381
Subject: Re: 401(k) Article Date: 4/25/2001 11:57 AM
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I can't make heads or tails out of your table.

Go to Excel, choose Save As, and change the format to "Formatted text, space delimited". Then open that file in a word processor or text editor, copy, and paste into the website.

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29304 of 75381
Subject: Re: 401(k) Article Date: 4/25/2001 12:00 PM
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TheHendrys,

As I hear it, the 401(k) limits are:

The employee can contribute the lesser of $10,500 or 25% of his salary.
The total money added to the 401(k), including both employee and employer contributions, must be less than $35,000 and must be less than 25% of her salary.

I don't know where taxable and after-tax comes into play.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29305 of 75381
Subject: Re: 401(k) Article Date: 4/25/2001 12:09 PM
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Greetings, C2Reed, and welcome. You wrote:

There is a 401(k)gotcha! that isn't related to the law but rather to how fast highly compensated employees contribute to the plan. It cheats employees out of part of the matching contribution that they would have otherwise gotten had they contributed at a lower rate.

That situation depends solely on your employer. Some will continue the match, and some will not.

Regards..Pixy


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Author: TerryMcK Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29309 of 75381
Subject: Re: 401(k) Article Date: 4/25/2001 1:08 PM
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C2Reed,
I don't see this as a "gotcha". Unlike some of the finer points being discussed in this thread, the limit and matching amount are the most basic parts of a 401K plan.
If someone offers to give me nn% for free, I think I can do the simple math to insure I get the full nn% over the 12 months rather than try to front load my contributions and lose some of the free $$ at the back end.

TMFpixy,
You stated that some employers would continue the match while others would not. I can't think of any reason or way that an employer could/would continue a match based on the scenario that C2Reed listed. If you miscalculate your contributions, that's it.

Terry

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29312 of 75381
Subject: Re: 401(k) Article Date: 4/25/2001 1:21 PM
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Greetings, Terry, and welcome. You wrote:

TMFpixy,
You stated that some employers would continue the match while others would not. I can't think of any reason or way that an employer could/would continue a match based on the scenario that C2Reed listed. If you miscalculate your contributions, that's it.


I repeat: It's entirely up to the employer. I have worked for more than one who could care less if I put my $10.5K in early. As long as I put in enough to receive the full match for the year, I got it. If the full match called for 6% of pay on my part for a maximum 3% match, the employer did not care when my dollar limit was reached. He matched 3% per pay period. If my contributions stopped in August (as they often did), because I had put in my 6% already for the year, the employer continued to do so. It all depends on how the employer wrote the plan document and how that document is interpreted by that employer.

Some employers are cheap. Some aren't. Most are.

Regards..Pixy

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29320 of 75381
Subject: Re: 401(k) Article Date: 4/25/2001 3:19 PM
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Author: C2Reed Date: 4/25/01 11:11 AM Number: 29296
There is a 401(k)gotcha! ...In a nutshell, it works like this: If a highly compensated employee (e.g. $104,000 annually) chooses to contribute at a rate of 15% per pay period, they will reach the $10,500 legal limit after the 17th pay period out of 26, after which they will no longer contribute. Their match of dollar for dollar up to 3% of pay will amount to $2,160, and they will have missed out on the 3% match for the last 8 pay periods of the year.

My plan didn't do this. I am also a highly compensated employee, and after I reached the maximum contribution, the company continued making the matching payments through most of the rest of the year even though I was no longer making any payments.

Now, I'm in the process of retiring, so I won't have to worry about it any more.

Russ





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Author: TheVlad Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29329 of 75381
Subject: Re: 401(k) Article Date: 4/25/2001 7:02 PM
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This topic was (and still is) discussed rather extensively on Foolish 401(k) board.

Basically, the thing is that while this is true for some companies, there are plenty of other companies that offer a "true up" match where they contribute at the end of the year whatever they need to to make the correct match for the employee.

Advice is read your benefit plan very carefully and see what situation you are in.

If you are in the situation where your company does not offer a "true up" match, you can contribute lesser percent per pay period which would allow you to still contribute the legally allowed maximum but get more in the company match.

Vlad

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