Is there a way around match limits?

[Guest kg78]

Plan currrently states 100% match up to 6% of comp; HCE's are limited to 7% deferrals. We have multiple people making over $245K. The max they could defer is $16,500 (assuming no catch-up); payroll is capping their match at $14,700, since the doc states cannot exceed 6% of comp & comp is limited each year. HCE's don't understand why they cannot get the full 100% match of 6% of their salary. Is there an easier way to explain this to them???

[Guest fender5150]

No.

You can show them this table:

http://www.401ktest.com/pages/terminology.asp#tables

This may help them understand that you're not making up the rule just to be mean.

Imagine the whining they'd do if you didn't have a safe harbor plan!

Are these salesmen? I used to be CFO of a large software company. The labor force make-up was 45% sales, 45% Development, 10% admin. Admin spent 80% of thier time taking care of the sales force, and 20% on everything else.

But just try to have a successful company without a good sales force!

Thanks,

Fender

www.401ktest.com

www.ProjectedFinancialStatements.com

[QDROphile]

$245,000 puts you into the middle class (if you are a Republican). The middle class can't get a match (thanks to the Democrats), so the plan pretends you are not in the middle class so you can get a match. Consider yourself lucky you get a match because the plan looks the other way at compensation above $245,000.

[GMK]

Maybe they would understand that the IRS says that in order for the 401(k) to qualify for its tax-deferred status, the 401(k) can consider only the first $245k that a participant makes (in 2009). As QDROphile points out, any compensation above $245k in 2009 is not part of the equation.

As a result, 6% of 245k (=$14.7k) is the most that the match can be in your 401(k) in 2009.

Qualified is a good thing for a 401(k) to be.

[12AX7]

kg78, I hope your payroll department is not living in the future. GMK has pointed out very clearly that the limits illustrated apply only to the 2009 year. So, for 2008 the match limit would be $13,800. If the limits were applied correctly for 2008, then the high wage earners would have understood this concept, unless it's a new plan effective in 2009. Good luck!

[K2retire]

If the limits were applied correctly for 2008, then the high wage earners would have understood this concept, unless it's a new plan effective in 2009. Good luck!

I wish my clients understood things after only one explanation -- and remembered them from one year to the next!

[GMK]

Come on. These are people who are smart enough to make over $245k a year. They are smart enought to understand this compensation limit.

Maybe pointing out that income limits are common. For example, they don't have to pay social security taxes on income they earn over a certain limit each year. Some limits are in their favor, some aren't.

The other thing they may want to know is: No, there aren't any loopholes by which the plan could consider more than $245k (in 2009).

[Guest kg78]

Thanks for the responses. The HCE's were limited to only 6% last year, so they never hit the deferral limit & this wasn't an issue. And no, they didn't understand this last year either. I'm just trying to make sure I communicate it as clearly as possible so that my staff doesn't get the phone calls again this year! It's simple to me, but I do this for a living!

[GMK]

Maybe handing out a written one-page summary to the HCE's would take less time than fielding the phone calls.

Keep it simple.

Explain that the compensation limit is one of the rules for having the tax-deferred plan,

point out how this limit is $245k for 2009 (an increase of $15k over 2008!),

remind that the plan limits the match at 6%,

and show the basic 6% x 245k = 14.7k math.

Invite them to ask if they need further clarification.

Alternately, write out a response with this basic information for persons who have to answer the phones.