Ideal maximum 401(k) contribution rate

[Guest planman]

Our 401(k) plan wants to increase the maximum deferral rate from 15% to something higher, but what? We only allow pretax contributions. I've heard Hewitt survey data shows 50% is the most common maximum. 100% seems excessive and complicates withholding for FICA, other benefits (i.e. medical), garnishments, etc. What maximums are other plans using?

[Guest Tbrown]

All of the plans we have done so far this year are merely stating that they can defer up to the maximum allowed by law. The way we are looking at it is if someone is making $11,000 and ask to defer 100%, it would be considered 100% AFTER FICA and local taxes are paid (and any other required withholdings). While that may not meet the "letter of the law", I believe it would stand up fine under audit. So far, the only cases where we have seen someone actually do this is working spouses of a key employee. In many cases, some of them were working before but not getting paid so they didn't have to double up on the FICA. Now they are being put on the payroll, but with enough in wages to cover FICA and Local taxes, then the rest (ideally $11,000) is all withheld as 401(k) (assuming that you go with a safe harbor to avoid the resulting ADP problems with an HCE making that large of a deferral).

[Archimage]

I am using 75% for my plans. I am leaving the other 25% alone in order to deal with payroll taxes and any other deferred comp items such as cafeteria plans. I have yet to see someone defer that much though.

[mbozek]

I have advised my clients to limit 401(k) elective contributions to 60% because of other possible withholdings such as plan loans, FSAs, FICA tax, united way contributions, etc. There is no reason to push the envelope since there are few employees who can contribute the max any way. There is also an economic issue for ers if the employer matches employee sr contributions. I think 75% may be too high if employee is making FSA and loan repayments since only 18.3% of comp would be available after FICA tax. Remember the 401(k) limit is an annual limit and even with the catch up it is a maximum of $1,000 a month.

[Guest FREE401k]

When this question came up at one of our clients, they told me that in the heirarchy of their payroll system (they use ADP) 401(k) cons are at the bottom. In other words, garnishments, taxes, etc. come out before 401(k) cons. So if they tell their system someone wants to contribute 100%, it is 100% after other required deductions are taken.

[mbozek]

FREE: this is fine as long as the language is in the plan doc--but the plan is written that way?

[david rigby]

"...taxes, etc. come out before 401(k) con"

Does not sound "fine" to me. How can taxes come out before 401(k) contributions?

[Guest planman]

Thanks for the feedback so far. Our plan matches up to 6%. We do not have safe harbor and currently limit HCE's to 7%. That is why we want to change the plan document to go to the higher maximum. We are eager to get those second wage earners that want to contribute $11,000 to help our ADP test since we have very low participation. We are a little worried that the regular $25,000/year employees might be offended by these higher maximums. We also want to add catch-up contributions, but that is a whole other administrative nightmare. Does anyone know of any other survey data i.e. Fidelity, Vanguard?

[Guest FREE401k]

Sorry, my fingers got carried away when I said "taxes, etc." What I should have said is that one of our large clients told me that in their payroll system 401(k) contributions are in a heirarchy of deductions that guard against a person electing to defer 100% of pay then having no money to fund other payroll deductions. I'm not sure of the specific order of the heirarchy (but of course taxes come out after the 401(k) con as Pax pointed out) but I know that as we talked about the new maximum 401(k) contribution and the issue of leaving enough money to fund other payroll deductions, the client said their system automatically takes care of that by the structure of the heirarchy of what is deducted first, what is deducted next, etc.

[mbozek]

Free: How is this hierarchy expressed in the plan document and to the plan participants? As some form of net maximum? It appears that your client seems to be using some form of hierarchy for its payroll system but is this incorporated in the plan document?

[MWeddell]

Some of my clients use 80% as the deferral limit. You want to use something quite high so that you don't have to worry about anybody actually contributing for a whole year (without hitting the 402(g) limit) and then wanting to make catch-up contributions.