415 Annual Limit Calculation

[Guest KathyL]

Our plan is rather simple so this should be easy to figure out, but I just want to make sure that I am doing this correctly. Employees can defer up to 20% of their pay into our 401(k) plan. There is no employer match and we have no other pension plan. We do have a 125 Cafeteria Plan for medical and dependent care expenses.

To figure out the 415 Annual Additions Limit I can first throw out the $30,000 limit because no one can contribute more than $10,000 in 1998. So now I just take 25% of their W-2 taxable income. Is it really that simple?

For example, someone making $50,000 contributes 20% to the 401(k) plan.

W-2 taxable income is $40,000 X 25% = $10,000. This person has not exceeded the 415 limit.

BUT if this person also contributes $5,000 to the 125 plan, W-2 taxable income would be $50,000-10,000-5,000=35,000 X 25% = $8,750. So this person would exceed the 415 limit.

The most this person could contribute to their 401(k) plan would be $9,000. ($50,000-9,000-5,000 =$36,000 X 25% =9,000).

We have a catch-up clause which allows people to defer up to 100% of their pay in December. So I have to keep an eye on this 415 limit to make sure that no one exceeds it. I want to make sure that I am doing this correctly and that my logic makes sense.

Thanks in advance for your help.

[Guest Dook]

For plan years beginning befor January 1, 1998 your calculation using "net" compensation is correct. For plan years beginning after December 31, 1997 the calculation is performed using "gross" compensation. For years after 1997, the plan could be changed to allow participants to elect up to a 25% deferral and not have to worry about 415 failures as long as it remains a deferral only plan.

[stephen]

404 limit still applies

Ex:

100,000 Compensation

-10,000 Cafeteria Contribution

-10,000 Salary Deferrals

80,000 Considered Compensation

20,000 Salary Deferrals divided by

80,000 Considered Comp.

= 25% which is greater than the 15% allowed in a 401(k) plan.

[This message has been edited by stephen (edited 10-17-98).]

[Guest John Nelson]

But, don't overlook fact that "compensation" for purposes of 404(a) deduction is still "net compensation" ,i.e, compensation minus 401(k) and 125 salary reduction contributions.