Limitation of regular contributions to 401(k) plan

[Guest casey5]

I've got a question on the maximum percentage amount of the paycheck that can be allocated to contributing to a 401(k) plan.

I was told by my company's accountant that not more than 75% of my paycheck can be allocated to my 401(k) plan (managed by Fidelity Investments). My question is: is there a federal law on such a limitation -- or this is just a company-invented rule? If this is just a rule, have anybody heard of similar limitations in other companies? What could be a reason for such a restriction?

Thank you.

[QDROphile]

There is no specified legal limit but there is a practical limit based on legal requirements. The 75% limit is a plan design feature, but maybe not an optional feature depending on the source of the plan document. It happens to correspond to a safe-harbor limit determined by the IRS with respect to catch-up contributions. That is another matter, but you can take it as a sign of legitimacy if you are the skeptical type. You cannot defer 100 percent because there are other amounts that are legally required to be taken from your check, such as FICA withholding and possibly othe taxes. There are also other amounts that you would want to have priority, such as salary reduction for healthcare premiums and childchare spending accounts under the employer's cafeteria plan. The one 75% size may not fit the demands on your pay very well, but reliable administrative uniformity keeps adminitration costs down, which also benfits you. Or so Fidelity would have you believe.