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Author: rgeist Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25235  
Subject: "Real" 401K cap Date: 6/13/2001 2:59 PM
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Question: When is a raise not a raise?

Previously, I contributed the maximum to my 401k each year. After recently receiving a raise from my employer (10,000+ employees), they reduced my maximum 401k pre-tax contribution from 13% of compensation to 6% because I am now considered by them to be "highly compensated" according to "special IRS rules" (they said the break point is $85,000). Unfortunately for me, this created a new "real" 401k cap of about $5,200 (less than 50% of the $10,500 cap). Therefore, the forced reduction in 401k contributions this year will make the increase in my tax bill more than my raise!

According to this math, someone making $80,761 would only be able to contribute $10,499, someone making $85,000 would only be able to contribute $5,100, and someone making $174,983 would only be able to contribute $10,499 (in all three cases, less than the $10,500 cap). Therefore, my employer limits eligibility to the $10,500 cap to those who make at least $175,000 or between $80,761 and $84,999.

Is my employer acting correctly? How can I get around this "real" cap? Are there any laws which should preclude my employer from being prejudicial to those making over $175,000 or a narrow band in the low 80's? Am I also prevented from benefiting from the new tax laws which increase the 401k cap over the next few years?

Any help would be greatly appreciated.
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