401K Deferral Question

[JimW]

Hi All,

My wife's employer caps her 401K deferrals at 15% of her salary. She gives the 15% max but it isn’t enough to reach the $18,000 max for annual deferrals. She is over 50 but also not allowed to make “catch up contributions” due to the fact that she hasn’t reached the $18,000 limit. She wants to put more money into her 401K but cannot do so due to these restrictions. It seems these restrictions are extremely unfair to those employees who cannot max out the $18,000 deferral limit with a strict 15% cap on deferrals. Are these restrictions allowed by law? Shouldn’t she be able to contribute more? It seems completely unfair to restrict her deferrals in this manner.

 

[mathjak107]

Hi All,

My wife's employer caps her 401K deferrals at 15% of her salary. She gives the 15% max but it isn’t enough to reach the $18,000 max for annual deferrals. She is over 50 but also not allowed to make “catch up contributions” due to the fact that she hasn’t reached the $18,000 limit. She wants to put more money into her 401K but cannot do so due to these restrictions. It seems these restrictions are extremely unfair to those employees who cannot max out the $18,000 deferral limit with a strict 15% cap on deferrals. Are these restrictions allowed by law? Shouldn’t she be able to contribute more? It seems completely unfair to restrict her deferrals in this manner.

yes , there is a formula that is used so it keeps the plan from being top heavy salary wise.

don't go by dollar figures , i don't know if they changed


What is a Top Heavy Plan?

A defined contribution plan is considered top heavy when more than 60% of the account balances are attributable to “key employees.” A key employee is an employee who meets any of the following criteria during the determination year:

• Owns more than 5% of the employer;
• Owns more than 1% of the employer and had compensation in excess of $150,000; or
• Is an officer of the employer with compensation in excess of a specified dollar amount ($165,000 for 2012), with certain limits on the maximum number in this category.

https://markleyactuarial.com/top-heavy-impact-on-401k-plans/

 

[JimW]

Quick update:

My wife has taken this to the company HR dept (along with a copy of the plan summary that shows that catch up contributions are allowed in their plan), who in turn has taken it to the 401K plan administrator. The 401K plan admin has realized (thanks to our efforts), that there is a deficit in the way the plan is being implemented. He did mention perhaps raising the 15% percent limit so all employees would be able to reach the 18K annual max or simply allowing the 6K in catch up contributions as remedies. As of this posting nothing has been done but hopefully we will hear something soon.
The woman in HR did mention to my wife that no one has ever questioned the current plan or wanted to make catch up contributions in the past, which we found hard to believe. At least the ball appears to be rolling in our favor.

 

[JimW]

yes , there is a formula that is used so it keeps the plan from being top heavy salary wise.

don't go by dollar figures , i don't know if they changed


What is a Top Heavy Plan?

A defined contribution plan is considered top heavy when more than 60% of the account balances are attributable to “key employees.” A key employee is an employee who meets any of the following criteria during the determination year:

• Owns more than 5% of the employer;
• Owns more than 1% of the employer and had compensation in excess of $150,000; or
• Is an officer of the employer with compensation in excess of a specified dollar amount ($165,000 for 2012), with certain limits on the maximum number in this category.

https://markleyactuarial.com/top-heavy-impact-on-401k-plans/

Thanks for the reply mathjak. Unfortunately my wife is not considered a Highly Compensated Employee in her company, so these restrictions do not apply to her. The problem is the way the company is currently implementing the 401K plan is discriminatory tor the regular employees of the company because they cannot reach the 18K max deferral with a 15% cap on deferrals. Therefore they are also technically not eligible for catch up contributions. It appears that the 401K admin in her company is now aware of the problem and hopefully a remedy will be put in place soon. You can read my update in the post above.