401k deferral

[Gary]

Say a one participant plan wants to defer $22,000 for 2010 (over age 50).

My understanding is that if his compensation is $22,000, he can defer 100% of his pay or $22,000 to the 401k plan in lieu of receiving his compensation in cash.

Does that make sense?

How would he pay his employee FICA taxes?

Or should the maximum deferral be 22k less FICA taxes in this case?

Or could he pay FICA taxes out of personal funds?

thanks

[J Simmons]

Say a one participant plan wants to defer $22,000 for 2010 (over age 50).

My understanding is that if his compensation is $22,000, he can defer 100% of his pay or $22,000 to the 401k plan in lieu of receiving his compensation in cash.

Does that make sense?

How would he pay his employee FICA taxes?

Or should the maximum deferral be 22k less FICA taxes in this case?

Or could he pay FICA taxes out of personal funds?

thanks

I think it has to be 22k less FICA taxes. The arrangement between the EE and ER is for compensation of 22k. The ER is obligated to withhold the FICA portion from the compensation. That means there is only available to be put into the 401k 22k less FICA taxes. The ER cannot honor both its legal FICA withholding obligation and the EE's election for the amount of the FICA taxes.

Your OP illustrates another good reason to limit the percentage of compensation that an EE may electively defer into the plan, at least to 92.35% if not a lesser percentage.

[mbozek]

Say a one participant plan wants to defer $22,000 for 2010 (over age 50).

My understanding is that if his compensation is $22,000, he can defer 100% of his pay or $22,000 to the 401k plan in lieu of receiving his compensation in cash.

Does that make sense?

How would he pay his employee FICA taxes?

Or should the maximum deferral be 22k less FICA taxes in this case?

Or could he pay FICA taxes out of personal funds?

thanks

pay himself 23,822.41 and deduct 7.65% fica tax (1822.41).

[Guest KVAlbert]

The employee could write a check for their portion of the FICA and Medicare tax.

[QDROphile]

You also have to take into account employee share of benefit costs, whether or not delivered through a section 125 plan, and there are all sorts of state and local payroll taxes that can come into play. One approach is to establish a hierarchy of amounts that are charged to compensation (whether or not compensation is reduced for income tax purposes by an amount), and the elective deferrals are probably last on the list.

[austin3515]

I've always understood that the general intepreation of 100% of pay is the lesser of 100% of pay or what is available to withhold (doesn't say that of course, but logic dictates that it is so). For example, another scenario might be that half his paycheck is being garnished for child-support. Can he defer 100%? Certainly not.

[QDROphile]

I agree that you can get to the hierarchy result by interpretation of plan terms. It would be a good idea to have the interpretation memorialized an maintained in administrative records.

[Guest jims]

It would be potentially wiser to have the plan document reflect a contribution limit less than 100% in order to eliminate/minnimize the need for maintaining the interpretation documents. Popular limits seem to be 50% or 90%.

[QDROphile]

The safe harbor for compliance with catch-up contribution availability requirments is 75%.