Maximum contribution at15K

When I initially joined my employers 401K , (three years ago) I elected to contribute 30% of my pay. This would put me near the maximum dollar amount allowed. My employer will only deduct 20% of my pay for my 401K .  I did some research and found that they are allowed to do this. Apparently there is a rule to keep a few employees from contributing way more  than the rest of the employees. So I am contributing $15k a year. My age allows me to contribute up to $25k. What can I do to make up for  this shortfall? I already max out my IRA contribution.

It really boils down to the specific plan language that is (or maybe isn't) restricting your contributions.  If it simply says "maximum contribution is 20% of pay" then that is pretty clear-cut.  But there are several caveats and comments that go with that...

• if it does say that, it is probably a poor design.  Doing the math, you are not a Highly Compensated Employee (made over $120K last year) and your employer should be encouraging higher rates of participation from you.  (I'm assuming you are not an owner or close relative of an owner.)  Plans might have special restrictions on HCEs but it doesn't seem to fit here.
• if it does not say that (and my educated guess is that it does not) then the employer and/or payroll company has/have done something dumb, on several levels - they aren't following your instructions, which means that if you want to push it, they should put money in for you, and they might also be artificially reducing certain testing ratios that would allow owners and other HCEs to contribute more for themselves.

You gave a lot of info but not enough.  I'd want to know the specific language they are relying on to reduce your contributions.  Also curious as to how many employees are in the company, and whether they are running the plan themselves or using an outside party for assistance.

Well, I wish I was a highly compensated employee, but my gross is around $75k. (15K is 20% of 75k) Yes, it is a small company. There are probably less than 50 employees. They do not run the plan, Fidelity handles it for them. There is no language that says only 20%. Apparently, most employees do not maximize their contribution.  Since I am older than most,  I am allowed to contribute more. I believe the below quote from the IRS website is what the company uses to justify my reduced contributions. I am neither of these. I mighty be considered a highly compensated employee compared to most of my co-workers. I really do not know. So what are my options, how do I get around this regulation. 

"If you are a manager, owner, or highly compensated employee, your plan might need to limit your deferrals to pass nondiscrimination tests"

1 hour ago, JohnLong said:

Fidelity handles it for them

That's a red flag for those of us on this board.  Most of us here (I think, at least the ones participating the most) are either owners or consultants of smaller companies that have a hands-on relationship with our clients and know the laws inside and out, or at least know enough to research or ask when unsure.  Fidelity is in it for the assets.  They may have some fine people on the admin side but they aren't taking the same approach that we are to running a plan.

It sounds like someone simply made a mistake - whether it is Fidelity or your employer, I don't know.  There used to be a time when contributions were generally limited to lower percentages, and it may be that such a limit is stuck in your payroll system incorrectly.  Go back to payroll and ask why you were limited, and if they say because the plan says so, ask to see that section.  Don't assume they know what they are doing.  Mistakes are made, all the time.  Let us know what they say.

1st ask to get a copy of the Summary Plan Description (SPD) and ask them where the 20% limit is spelled out.

2nd check to see if the plan allows for Catch-up contributions for employees age 50 and over. If it does then by law you are allowed to defer 20% + the Catch-up limit.

If there is no 20% limit in the document, ask why they have not been following the terms of your election which is 30% of pay.

This makes sense. I have  been with the company for three years now. I vaguely recall the HR manager saying something about it when I questioned the 20%. I believe he said there would be  catch up period at the end of the year. I need to touch base with him. Thanks again, you guys are the best. 

6 hours ago, JohnLong said:

Well, I wish I was a highly compensated employee, but my gross is around $75k. (15K is 20% of 75k) Yes, it is a small company. There are probably less than 50 employees. They do not run the plan, Fidelity handles it for them. There is no language that says only 20%. Apparently, most employees do not maximize their contribution.  Since I am older than most,  I am allowed to contribute more. I believe the below quote from the IRS website is what the company uses to justify my reduced contributions. I am neither of these. I mighty be considered a highly compensated employee compared to most of my co-workers. I really do not know. So what are my options, how do I get around this regulation. 

"If you are a manager, owner, or highly compensated employee, your plan might need to limit your deferrals to pass nondiscrimination tests"

That quote, while correct, ABSOLUTELY does NOTapply to you.  It applies to what are known (legally) as Highly Compensated Employees, and you are not one.  My guess is someone just screwed up by limiting you.  You can DEMAND an explanation of why you can't defer more than 20% from your employer; then see what happens when they figure out that they can't limit you.  Best of luck.

On 12/30/2019 at 9:07 AM, JohnLong said:

Well, I wish I was a highly compensated employee, but my gross is around $75k. (15K is 20% of 75k) Yes, it is a small company.

"If you are a manager, owner, or highly compensated employee, your plan might need to limit your deferrals to pass nondiscrimination tests"

Just to be clear here you also aren't an owner or a family member of an owner are you? 

My guess is the answer is "no" because if you were an owner or a family member of an owner your problem would get solved quicker.  But let's make sure something isn't being overlooked here however.

You may be considered a highly compensated employee if you own or are deemed to own more than 5% of the company. "Deemed to own" means you are attributed ownership from certain family members, but you are also "deemed to own" any shares that you have the option to buy, even if you do not actually own the stock. Has your employer granted you any stock options?