I want to contribute the maximum to my 401k for this year. I have some money already deducted from each paycheck, but I want to make a one time payment to bring me up to the maximum for 2006. I called my company's 401k provider and they said this is not allowed. Is this true? do I have any other options?

I want to contribute the maximum to my 401k for this year. I have some money already deducted from each paycheck, but I want to make a one time payment to bring me up to the maximum for 2006. I called my company's 401k provider and they said this is not allowed. Is this true? do I have any other options?

The only thing you can do is increase the % of your paycheck before the end of the year. You will need to know how long it will take for the change to take effect and should increase the contribution rate based on how much money you want to add over the remaining pay periods.

Fuskie
Who agrees it is true you can not make a lump sum year-end contribution...

I have never been told that lump sum contributions are not allowed by law. But employers are forever trying to control costs and paperwork that go with their plans. So no lump sum contributions is an easy rule to put in place to reduce paperwork and costs.

I want to contribute the maximum to my 401k for this year. I have some money already deducted from each paycheck, but I want to make a one time payment to bring me up to the maximum for 2006. I called my company's 401k provider and they said this is not allowed. Is this true? do I have any other options?

In my 401K I'd have to make the change by 11/30 for it to be effective 12/15 -- yours is probably similar so you'll have to act fast. You can probably increase your deduction to 50% of gross (up to the max of $15,000 for 2006) for a couple of pay periods and that's not chicken feed.

I can increase to 50%, which i did. But they said it may take up to 2 pay cycles to take effect. And even if it took effect immediately, it would not bring me up to my maximum for the year.

Oh well, lesson learned: don't forget about 401k until the end of the year.

Hopefully you will have a better understanding of your finances for 2007 so that you can stretch your maximum contributions over the full year.

Fuskie
Who suggests that you look into a Roth IRA as a place to put the funds you could not direct into your 401k...

i looked at Roth IRA a while back, but I was above the income limits, unless they've increased recently. I will have to check again.

i looked at Roth IRA a while back, but I was above the income limits, unless they've increased recently. I will have to check again.

If you are above the income limits for a Roth IRA, you may want to double-check your 401k contribution limits. If you are a highly compensated employee, you may be prevented from contributing the full amount to your 401k anyway due to a lack of participation by lower income employees.

Fuskie
Who thinks if this was the case you would have received a letter, however...

I have never been told that lump sum contributions are not allowed by law.

I dunno, I thought 401K contributions *had* to be payroll deductions. Section 401(k) of the tax code is under the section on 'deferred compensation'. Its not really 'deferred compensation' if you get it and then return it.

Specifically it says the plan is one...
"under which a covered employee may elect to have the employer make payments as contributions to a trust under the plan on behalf of the employee, or to the employee directly in cash;"

So it seems employer has to make the contribution (on your behalf), not you (of course I would not pretend to know that there isn't other wording of technicalities that make this interpretation wrong).

Source:
http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000401----000-.html


From a practical perspective, 401K contributions aren't a tax 'deduction' from your income per say, its that they aren't even listed in your gross income to begin with (for income tax purposes - i.e. W2 box 1). Its supposed to be money you never got.

So if you were to make a 'lump sum' contribution, your employer would need to know to subtract that out of your box 1 total wages. If that *is* legal (not reporting income that they paid you, but you then 'returned'), its certainly would be quite a hassle.

Oh well, lesson learned: don't forget about 401k until the end of the year
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I take my base hourly rate, multiply buy 40 (hours per week) and then multiply by 26 (weeks)to get my annual estimated salary. This does not include OT, call pay and other additional monies. Then I take the annual amount I can contribute (in my case $15k) and determine the percentage to withdraw per pay period to meet that number. adjust my withdrawals accordingly, knowing full well that OT and other monies will help me hit that max before the year end.

Rinse and repeat.

MZ4

i looked at Roth IRA a while back, but I was above the income limits, unless they've increased recently. I will have to check again.

If you are above the income limits for a Roth IRA, you may want to double-check your 401k contribution limits. If you are a highly compensated employee, you may be prevented from contributing the full amount to your 401k anyway due to a lack of participation by lower income employees.

Fuskie
Who thinks if this was the case you would have received a letter, however...
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Like I got this last March 15 (the last day they had to send it to me), along with a check for close to $6500 (almost 50% of my 401k withholdings! for the year!).

Those funds went into my taxable investment account....That';s another story....

MZ4

and then multiply by 26 (weeks)to get my annual estimated salary

I assume you mean 52? :)

and then multiply by 26 (weeks)to get my annual estimated salary

I assume you mean 52? :)


Not MarinBMWZ4, but 26 probably based on paycheck every 2 weeks?




Hohum

Not MarinBMWZ4, but 26 probably based on paycheck every 2 weeks?

I thought that too, but then noticed he said 40 hours. So either Marin works 20 hours/week, meant 80 hours, or meant 52 weeks :)

Either way, it doesn't have to be that complicated. The max contribution is $15,500 for 2007. If you get paid every two weeks, you can deduct $596.15 from each paycheck to get the maximum.

I set mine at an even $600, and will lower it a bit for the last few pay periods of next year.

Karen
(who doesn't have to worry about getting a big check back...)

Not MarinBMWZ4, but 26 probably based on paycheck every 2 weeks?

I thought that too, but then noticed he said 40 hours. So either Marin works 20 hours/week, meant 80 hours, or meant 52 weeks :)
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Never do math and drink margarita'aazzz

OK. minimum scheduled hours is 40 hours per week.
Biweekly payroll.
Using my base salary at the beginning of the year I do the math as if I will not work any overtime, will not get any standby pay (which can be as much as my base salary) nor my annual salary increase in October nor my step increase in September (I said it was a great job - everybody should get their children to train to become xray techs - plus we have a rock solid contract).

Then, by September I usually have fully funded my 401k and I effectively give myself a nice raise in the fall...

MZ4

Then, by September I usually have fully funded my 401k and I effectively give myself a nice raise in the fall...

No matching? Or do they do it nice? Cause in many places this is a sure way to miss out on part of the match.

No matching. Not a penny. The doctors on the other hand, get a nice match. Whatever, I still end up getting back 40% or more due to being a Highly Compensated Employee (google that for fun!). It doesn't matter how much I put in, I will always get a big chunk back. Those funds this last year went into my trading account and I have been doing good and bad, depending on the day, with those funds. I suspect that next year I'll start doing a more LTBH strategy using stocks generated from the "BMW" board. http://boards.fool.com/messages.asp?mid=24884612&bid=116681

MZ4

No matching. Not a penny.

...

Whatever, I still end up getting back 40% or more due to being a Highly Compensated Employee (google that for fun!).

To connect the two, your plan can actually be exempt from HCE rules ('safe harbor') if they *do* do sufficient matching. Could kill two birds with one stone there, but not like you have any control over that.

Our problem is that there are not enough of the rank and file staff members participating. The Docs are a separate organization, as well as the nurses. I'm all for mandatory enrollment.....


MZ4

Our problem is that there are not enough of the rank and file staff members participating. The Docs are a separate organization, as well as the nurses. I'm all for mandatory enrollment.....

Yes, however, if you do enough matching, you are exempt from needing to pass that test (then again, matching will also help the 'rank and file' participate more).

If you do either of those, you are given a pass on the 'nondescrimination' tests.


(12) Alternative methods of meeting nondiscrimination requirements
(A) In general
...
A cash or deferred arrangement shall be treated as meeting the requirements of paragraph (3)(A)(ii) if such arrangement—
...
(B) Matching contributions
(i) In general The requirements of this subparagraph are met if, under the arrangement, the employer makes matching contributions on behalf of each employee who is not a highly compensated employee in an amount equal to—
(I) 100 percent of the elective contributions of the employee to the extent such elective contributions do not exceed 3 percent of the employee's compensation, and
(II) 50 percent of the elective contributions of the employee to the extent that such elective contributions exceed 3 percent but do not exceed 5 percent of the employee's compensation.


http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000401----000-.html

(B) Matching contributions
(i) In general The requirements of this subparagraph are met if, under the arrangement, the employer makes matching contributions on behalf of each employee who is not a highly compensated employee in an amount equal to—
(I) 100 percent of the elective contributions of the employee to the extent such elective contributions do not exceed 3 percent of the employee's compensation, and
(II) 50 percent of the elective contributions of the employee to the extent that such elective contributions exceed 3 percent but do not exceed 5 percent of the employee's compensation.

My company switched to such a safe-harbor plan several years ago, which finally allowed me to contribute more than 7% to my 401(k). Get you fellow workers together and lobby to convert to a "safe-harbor" 401(k) plan.

foolazis

My company switched to such a safe-harbor plan several years ago, which finally allowed me to contribute more than 7% to my 401(k). Get you fellow workers together and lobby to convert to a "safe-harbor" 401(k) plan.
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unfortunately we have 1000's of workers. getting them to do anything, much less agree on something like this is beyond even their limited capabilities......

Mz4

Suppose a common situation. You get qualified to participate in the 401K plan at your employer only on October 1 with no prior contributions for the year in a plan that allows a maximum contribution of 25%.

Could you make the full 25% contributions to the 401K plan pretax? As long as you do not exceed the $14K limit, I suspect yes. So that kind of catch-up is legal if your employer is willing to put up with the paperwork. (Presumably you reduce to a more normal contribution on Jan 1.)

I know of employers who require that you file paperwork every year for the then current years contribution (and make you figure your own pretax cutoff--stopping automatically if you exceed it). They probably do not care if you make catch up contributions in this way.

Others might find the added paperwork burdensome.

As long as you do not exceed the $14K limit

It's 15K for 2006. I just hit it and its listed on my paystub as that amount.

Paul