100% deferral, limited to 90% by payroll provider??

[Craig Garner]

A plan (and the plan document) allow for deferrals up to 100% of pay. Of course, the deferral is not really 100%, but 92.35% due to payroll taxes.

However, a client just informed me that a large payroll provider (which will remain nameless) has implemented a new "policy" which will only allow a max deferral of 90%.

First, has anyone run into this issue?

Second, what problems does the plan have as a result of this? Should the plan amend to use a 90% max? Should HR try to "override" each payroll manually to get to 92.35% each payroll period? Probably both of these options are ok. But, I would think that we can't just leave this alone and only defer 90% when the election is for 100%.

Ideas?

[Bill Presson]

I think you have two options:

1. Amend to 90%

2. Find a new payroll provider

As a general rule, we recommend clients keep the maximum at 80 or 90 because of the payroll tax issue.

[GMK]

And it's not quite that simple, is it? The part of compensation that is not deferred is taxable income. The FICA amount is subject to federal income tax at a rate of 10%, as is the amount paid as income tax, so income tax = 0.1 x (FICA + income tax), or income tax = FICA / 9.0.

For compensation of say $1000, FICA is $76.50, and federal income tax is $8.50. So, there's $915.00 left to defer. If there are other deductions, such as, for insurance, state income tax, etc., it's more complicated, and there's less left to defer.

Bottom line is that Bill Presson's general rule is a good suggestion, and I'd lean toward 80% or 85%, because 90% may be cutting it very close.

[david rigby]

You might have issues other than taxation, such as EE contributions toward medical coverage, LTD coverage, etc.

[BG5150]

Who defers 100% anyway?

[GMK]

For one, the person who just inherited a pile of cash and decides to live off that money and squirrel away as much paycheck money as they can tax-deferred for retirement.

[Bill Presson]

Who defers 100% anyway?

Usually, it's the wife in a physician practice that is performing office services for about what the deferral amount would be.

[hr for me]

I'd say someone who is only working to save for retirement and has other income to use to live on. Usually a spouse who might have the other one who makes plenty and just wants to work for something to do. It happens. I would defer more if I weren't paying for 2 in college and one future to college!