Deferring 100% of comp. How to reconcile to plan doc?

[BG5150]

Plan doc says participant can defer up to 100% of comp.  Compensation for plan purposes is 415 Comp.

But as we all know, certain taxes are taken before the 401(k) can be deferred.

So, if I make $5,000 this pay period and I want 100% of my pay deferred.  But, $350 is withheld for various taxes (like Soc Sec).  Now my check is only $4,650.  ER deposits $4,650.

But my compensation is $5,000.  My SPD says 100% of comp, which is 415(c) comp, no exclusions.

Where does it say that $350 cannot be put into the 401(k) plan?

I understand the logistics, but cannot reconcile the semantics. 

[Belgarath]

Many documents restrict the deferral amount to 92% of pay for just this reason. But my answer is that you can't defer money that you can't receive, and since the SS is mandatory, there's no option to receive $5,000, hence you can't defer it. For me, what passes as common sense. Doesn't mean I'm right...

[Bird]

Agree with Belgarath.  I try no to invoke "common sense" in pension discussions but just 'cuz the doc says 100% doesn't mean you really can; it's just not enforceable.  Taxes take priority.

[QDROphile]

Well-drafted plan documents will expressly provide for the plan administrator (the fiduciary one) to have authority to interpret the plan.  Best practice is for the plan administrator to memorialize the interpretation of the plan terms for administering an elective deferral that exceeds the available amount net of all other deductions and elective reductions from gross compensation, if the plan documents otherwise do not adequately deal with the priority. Make sure to be comprehensive.  E.g., determine where elective deferrals stand relative to section 125 elective reductions.  If the interpretive authority is not express, it is implicit in the law, and increases the importance of the fiduciary's assertion and memorialization of the authority and the interpretation. 

[Luke Bailey]

On 11/3/2021 at 11:35 AM, BG5150 said:

I understand the logistics, but cannot reconcile the semantics. 

I agree with others above that would be better to spell out in the plan documents and SPD that the limit is 100% of what you have after taxes and other deductions (e.g., medical) are taken out, but  think with every plan document I've ever reviewed you can get to the common sense interpretation advocated above by others through the plan administrator's authority to interpret the plan document, if you have to.

[Nate S]

On 11/3/2021 at 12:35 PM, BG5150 said:

Plan doc says participant can defer up to 100% of comp.  Compensation for plan purposes is 415 Comp.

But as we all know, certain taxes are taken before the 401(k) can be deferred.

So, if I make $5,000 this pay period and I want 100% of my pay deferred.  But, $350 is withheld for various taxes (like Soc Sec).  Now my check is only $4,650.  ER deposits $4,650.

But my compensation is $5,000.  My SPD says 100% of comp, which is 415(c) comp, no exclusions.

Where does it say that $350 cannot be put into the 401(k) plan?

I understand the logistics, but cannot reconcile the semantics. 

W-2 and 3401(a) both have the caveat of "wages for the purpose of income tax withholding", which would be the amount payable AFTER SSDI and other voluntary withholdings are applied.  415 says "wages, salaries, fees, and other amounts for personal service... ...to the extent that the amounts are includible in gross income".  Gross Income is likewise determined after SSDI and other voluntary withholdings are applied.

This is also why that 92% limitation is complete rubbish, an\ actual strict definition interpretation of that limit would mean that you always end up with an 8% cash payment as a result.

[Luke Bailey]

On 11/5/2021 at 1:08 PM, Nate S said:

W-2 and 3401(a) both have the caveat of "wages for the purpose of income tax withholding", which would be the amount payable AFTER SSDI and other voluntary withholdings are applied.  415 says "wages, salaries, fees, and other amounts for personal service... ...to the extent that the amounts are includible in gross income".  Gross Income is likewise determined after SSDI and other voluntary withholdings are applied.

This is also why that 92% limitation is complete rubbish, an\ actual strict definition interpretation of that limit would mean that you always end up with an 8% cash payment as a result.

Nate S, not sure what you mean, exactly. Box 1 of W-2 and 3401(a) wages are gross, i.e., including the income and employee FICA that will be withheld. Also, by "SSDI," do you mean "FICA?"

[Nate S]

On 11/8/2021 at 2:34 PM, Luke Bailey said:

Nate S, not sure what you mean, exactly. Box 1 of W-2 and 3401(a) wages are gross, i.e., including the income and employee FICA that will be withheld. Also, by "SSDI," do you mean "FICA?"

Yes to both.  OP wants to question that the deferral should be calculated on the highest total that the employer is allocating to the employee; but all three definitions of compensation are already defined as being net of all other withholdings and FICA/SSDI (Burma/Myanmar, Candlestick/3Com, Shea/Citi Field, picky, picky, picky...)

[Kevin C]

On 11/3/2021 at 12:11 PM, Belgarath said:

But my answer is that you can't defer money that you can't receive, and since the SS is mandatory, there's no option to receive $5,000, hence you can't defer it. For me, what passes as common sense. Doesn't mean I'm right...

I agree common sense doesn't always apply to plan rules. But, in this case, I read the Code as agreeing with you.  

Quote

401(k)(2)(A) under which a covered employee may elect to have the employer make payments as contributions to a trust under the plan on behalf of the employee, or to the employee directly in cash;