Is employers 401k deduction calculated properly?

[Guest davida]

I have a question regarding calculation of 401k deductions when there is also a pre-tax medical deduction. My wifes employer deducts her medical insurance pre-tax premium first and then calculates her 15% 401k contribution based on her gross salary minus the medical premium. Is this correct?

Not only does it result in a slightly less contribution each paycheck to the 401k account but the employers match is also reduced.

Any input would be appreciated...

thanks

[IRC401]

There is no one correct way to do the calculation. The correct way is whatever way is specified in the plan document. Most plans (that I am aware of) add both 401(k) and 125 salary reductions back to compensation for purposes of determining what the 401(k) election applies to.

[david rigby]

Agree. The only correct guidance here is how the plan document defines the employee deduction/contribution. Might be the definition of "compensation" that is relevant.

The participant should probably inquire about this (as spouse of a participant, you don't really have any standing to inquire). Also look in the summary plan description (SPD) for a description of "compensation" or "deduction". In my experience, the description given above by IRC401 is very common. Possible that your situation is a mistake in the payroll system.

[Guest davida]

Thanks for the replies, i feel that the way they are calculating my spouses 401k contribution is not correct, she would like to be fairly certain before she inquires my 401k contribution is calculated 15% of my pretax earnings and are not reduced by 125 deductions. If possible your opinion on the following excerpts from the plan details regarding contributions and compensation would be appreciated. There was nothing noted regarding the actual calculation.

Contributions: "You may make employee deferral contributions between 1% an 15% of your pretax earnings"

Compensation: "Eligible compensation for determining contributions is you taxable compensation for the plan year which is reportable by your employer on IRS form W-2. This includes salary reduction contributions you made to an employer sponsored cafeteria, 401k, 403b plan. Excluded from the safe harbor employer contributions are reimbursements or other expense allowances, fringe benefits, moving expenses, deferred compensation and welfare benefits."

[AndyH]

Your suspicions are correct. Based upon this definition of compensation, the deferrals and possibly match (if conditioned on deferrals) are being incorrectly handled.

This could be a big problem for your employer. It needs to make employees whole.

[Guest Jeff V]

While I don't think it's very well worded, I think the verbiage "Eligible compensation for determining contributions is...reportable by your employer on IRS form W-2" means that they have chosen to take deductions from W2 wages, not gross. W2 wages are net of IRC 125 Contributions, so they may be handling the deferrals in accordance with the plan. I'd look at the plan document for clarification. All participants have the right to inspect the plan document at the Plan Administrator's office, upon request.

[Guest davida]

Thank you for the replies...The definitions for compensation and contributions were taken from the summary plan description. Jeff, i can see your point with regards to the statement about the W-2, but wouldn't taxable compensation mean gross wages? It is a little confusing and W2 wages are also net of 401k contributions although they are noted in a seperate box. I just find it hard to believe that a the plan limits the 401k contributions (and match, yes andyh they are conditioned on deferrals)because someone might have a more expensive medical plan for say an entire family than say just a single employee.

any other input would be appreciated, pax & irc401 any comments since posting of spd details?

[Guest Jeff V]

david, I can see your point as well. I can interpret "taxable compensation" many different ways. They should use gross comp., or W2 comp without other embellishments.

Good luck.

[david rigby]

Hmmm...

The definitions quoted are only slightly helpful. I suggest that you obtain the exact wording in the plan document. Still seems likely that the practical application (that is, in the payroll system) may not agree with the plan, although I am only suggesting an untentional misapplication.

[rcline46]

The SPD clearly indicates inclusion of 125 and 401(k) in compensation used to calculate deferrals and match. Even if not in compliance with the document, participants are relying on the SPD for their benefits. A court will rule in favor of participants if it comes to this. Davida's spouse should question this immediately with her HR/Payroll person, also the Plan Administrator.