Must a plan stipulate a maximum percentage for employee contributions

[MWeddell]

Short answer is that stating that the maximum elective deferrals is the Section 402(g) limit ($10,000 in 1999; $10,500 in 2000) is permitted. One doesn't have to state a maximum contribution percentage

Some reasons why having a maximum contribution percentage might be a good idea:

- Your 401(k) recordkeeper might require that its plans state a maximium contribution percentage.

- To keep contributions (especially from nonhighly compensated employees) rising when employees' compensation rises, you might prefer employees to make elections in terms of percentages of compensation, not dollar amounts. Elections as a percentage of pay may be more consistent with your communications campaign.

- Elective deferrals in excess of the 415 limits may be refunded only for certain reasons. I'm paraphrasing the regulation very loosely, but in general one can only correct 415 amounts if the error wasn't reasonably foreseeable. This is the reason most plans set the maximum contribution percentage at no higher than 25% minus the percentage of pay of all other defined contribution plan contributions and forfeitures.

[Guest mulrenan]

Must a plan stipulate a % for employee contributions or could the plan state the $10,000 is the maximum allowed employee salary deferral for 1999 without mentioning a %? This maybe some employee's wish if e.g. annual salary is $50,000 and they want to contribute the 10,000 max (equal to 20% of salary)Is this allowed?

Thanks

[Brenda Wren]

We like to limit the rate of deferral with administrative measures as opposed to the actual plan document. We word the document so there is no other limit other than those in the Code. But for all the reasons mentioned above, limits are needed in many cases. So we communicate this to the employees at enrollment meetings. Then we hopefully have eliminated "operational defects" when a participant defers 16% rather than 15%.