Can my 401(k) deny me from making Catch-up?

[Guest Questioner]

Inherited money now makes it possible for me to increase funding of my 401(k). With max contribution now set at $15,500 -- plus a catch-up of another $5,000 -- I approached my HR dept to get the necessary paperwork.

I was told the $15,500 limit and the $5,000 catch-up didn't matter. I was limited to 15% of my yearly gross, or, roughly, $8,500 max. Further inquiry on my part led to this response from them:

"The 15% maximum is a number we have derived from the maximum that can be contributed to a 401k (25%) reduced by a high estimate of aggregate contributions from the company. IRS penalties are draconian for employees and the company if the threshold is breached, and the Plan is IRS approved. QED."

I'm not sure if our Plan is a "Profit Sharing Plan", a "401k", some combination of both, or whether such distinctions make a difference.

The company does make an annual profit sharing contribution into everyone's account -- in an amount that is determined by (1) company profit, (2) years with company, and (3) what your salary is -- but they do not now, nor have they ever, matched any employee contributions.

Does what I have been told sound legitimate? If so, is there any other way to increase my tax-deferred contributions toward returement? I had been led to believe the Plan at work disqualified me from contributing to an IRA (since W2 box 13 has "retirement plan" checked). Is that really true, and does being 50 make any difference in my eligibility for tax-deferred IRA contributions?

Thanks.

[rcline46]

There are several items in play here. The law provides what is possible to include in anyone's plan, but the plan sponsor is free to implement something more restrictive than the law. So - the law provides that the maximum 401(k) contribution (actually the maximum is in 408(g)) is the lessor of $15,500 OR 100% of pay. The law also (EGTRRA starting in 2002) provided that those 50 and over can contribute an extra $5,000 to a 401(k) plan - the catch up contribution.

However, no plan MUST permit these things to happen. I strongly urge you to get a copy of the most recent Summary Plan Description from your HR department. You should have received on in the last 4 years, but you can request a new one for free.

The explanation you received was true prior to 2002, but the changes effective in 2002 removed ALL of the reasons you were given. Almost every plan was modifed for the 2002 law (they were required to be restated by September 30th 2003). They did not not have to make their plan more liberal. My experience has shown that many in HR never read the changes in their documents and are giving bad information to participants.

So, I repeat - get a copy of your most recent Summary Plan Description and read it.

[Bird]

Expanding on the above response, which is accurate, I'd add that the HR department appears to have one thing right (limit of 25%, which was raised from 15% effective in 2002), but another thing wrong - 401(k) deferrals don't count against the limit, again effective in 2002. In other words, the law used to limit combined company and employee contributions to 15%, but effective in 2002, not only was the limit raised to 25% but it only applied to company contributions. So...there's no justification (at least as would apply to maximum contributions) for limiting employee deferrals to 15%. That doesn't mean that the plan doesn't have such a limit, just that there's no (good) reason for it. As suggested, get the latest SPD, and if it does limit you to 15%, check the date (pre 2002 or post 2001), and if it's from before 2002 ask where the newer one is, and also ask for a copy of the relevant page(s) of the actual plan document showing that limit.

[Belgarath]

"If so, is there any other way to increase my tax-deferred contributions toward returement? I had been led to believe the Plan at work disqualified me from contributing to an IRA (since W2 box 13 has "retirement plan" checked). Is that really true, and does being 50 make any difference in my eligibility for tax-deferred IRA contributions?"

You can still contribute to an IRA, but it may or may not be deductible, depending upon your income level. However, I'd certainly instead consider setting up a Roth IRA based upon your apparent situation. Although not deductible currently, the earnings will be income tax free if you handle the distributions properly (generally, wait until age 59-1/2). You can currently contribute $4,000 plus a $1,000 catch up. Check IRS publication 590 for details.

[RCK]

Is this a union plan?

[Guest Questioner]

I upped my deferral to the stated 15% max. Depending on the outcome of the SPD, hopefully I can increase beyond the 15% max they told me.

I requested a copy of the SPD. I'll report back when I receive it.

My 47 yr old wife is not covered by a retirement plan so I can shelter another $4k in a TIRA for her.

I believe Pub 590 shows my MAGI above limit for deductible TIRA in my name.

I'm going to have do my homework on the Roth IRA. But I could max $5k of non-deductible contributions in either a TIRA or Roth IRA since I'm 50?

My retirement plan is not a union plan.

Thanks again guys. I've got lots of other questions (ie: pros & cons of paying off $100k 5.25% mortgage vs investing the $100k in index or target retirement accounts) but I'll wait to pose them until I can get this 401k funding limit resolved.

[Guest BXO]

Was "QED" actually used in the email response to you?

I know what it means. I find it condescending, arrogant and likely incorrect in this instance.

[RCK]

A recent plan survey showed only 13% of plans with a cap under 20%. The average was 37% and the most frequent was the 50-59% range.

I agree with BXO about the QED response. Sounds like a toddler who has learned a new word.

[WDIK]

Was "QED" actually used in the email response to you?

I know what it means. I find it condescending, arrogant and likely incorrect in this instance.

If it were me, I would not be offended. I already know that I need to Quit Eating Doughnuts.

[Guest Pensions in Paradise]

Questioner - you may want to ask the powers-that-be to amend the plan to increase the 401(k) limit to 100%. As others have mentioned, there is no longer any reason for a plan to cap 401(k) deferrals at 15%. More than likely whoever amended your plan in 2002 just copied the prior provision which had a 15% cap.

If the person you speak with says that the plan can't be amended, ask to speak to someone higher up. Again, there is no detriment to the company for increasing the limit.

[JanetM]

PiP gives good advice. The limit on EE deferrals doesn't impact the company at all and is good recruiting and retention item.

I always thought QED was quickly end discussion, not quit eating donuts, LOL that is the only hope I have to gain weight.

[Lame Duck]

I will be interested in what the SPD says. I think it is possible that the person Questioner spoke to is not aware of the amendments made in 2002. Questioner can also request a copy of the actual plan document if the language in the SPD is not current.