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Does anyone know why company A would allow employees to contibute 18% of their income to their 401K while company B allows only a 15% contribution? What benefit do they gain by keeping the % at a lower level? If the answer involves "discrimination testing" could someone include a lttle more detail regarding how that actual works vis-a-vis the differential in %'s allowed.

It doesn't involve "discrimination" testing.

The current tax law (in 2001) effectively puts a "soft cap" on 401k contributions; the employer's tax deduction for the 401k is capped at 15% of the total payroll...if the employees defer more than 15% of the total payroll, the employer loses out on some tax benefits. The simplest way to ensure that the total amount contributed to the 401k plan is 15% or less is to cap each individual employee at 15%.

In practice, relatively few people contribute the max amount, so some companies are prepared to take the risk of upping the max deferral to 18% or 20%. But other employers aren't willing to take the risk. (I think this is changing next year, but I'm not positive; however, even if the tax law changes, your employer will have to update their plan.)

Then, there is also the firm limit on total contributions (employee plus employer) which is calulated per employee---an employer with a generous match might have to cap higher employee deferrals for this reason. (That's changing next year.)

Good Luck,
JDOyster

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