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


Craig Garner

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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?

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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.

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

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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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!

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