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Author: Draggon Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121144  
Subject: 401k Maximum Contribution Scenario Date: 10/17/2002 8:24 AM
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I just received a check from Merrill Lynch that claimed to be a "415 Excess" distribution. The Net amount of the check was less 10% in Federal Taxes. Needless to say, I was a bit perplexed as to why I was receiving this check, since I thought I managed my 401k contributions successfully last year (2001).

First a touch of background. The company I worked for during the first half of 2001 was bought by the company I worked for during the second half of 2001. Because of this, I now actually have two 401k accounts, only the new one receives new contributions. The old one received contributions for the first half of 2001.

My total Personal Contribution for 2001, totaling both accounts was exactly $10,500 - the maximum allowed.

For 2001, the Total Contribution to a 401k account (including Personal Contribution, Company Match, and Profit Sharing) was 25% of your total compensation or $35,000 - whichever is less.

Okay, here's why I got the check...

The company I now work for took the total compensation (X) that I earned during the 2nd half of last year (while working for them) and based my total allowable 401k contribution on that number (25% of X). They then combined my Personal Contribution to the new 401k (2nd Half 2001), the company match during that time period, and the Profit Sharing contribution (which wasn't contributed until 2002, but was somehow credited to 2001's contributions).

This combined number was larger than 25% of X, so they issued a check. The amount of the check was "adjusted for gains and losses as of 12/30/01", and as I mentioned before was less 10% Federal Taxes.

Now... hang in there... if you took my Total Compensation from last year (Y), the TOTAL contribution to both 401k's for 2001, including Personal, Match and Profit Sharing was less than 25% of Y. So, that leads to my first question:

Did my new employer follow the 401k rules correctly? In the case of company buyouts, can the new employer limit your (total) contribution to their 401k to 25% of the salary they paid you while you worked for them? Or is the 25% limit based on an ANNUAL limit, no matter how many plans you may have been in?

Secondly, assuming that they did this correctly, how are my taxes affected? The amount on this check was included as tax-deferred income on last year's 1040. Now I have the cash, so is this considered income to be reported for 2002? Do I get a tax credit for the 10% Federal Tax that was witheld on this check?

I know this is long and boring, but it was an unusual enough scenario that I thought some of you who are really into this kind of thing might enjoy bantering about it.

Thanks for your time...

Draggon
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