Not allowed to fully fund my 401k? Options?

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Joe_R95
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Joined: Tue Dec 15, 2015 10:45 pm

Not allowed to fully fund my 401k? Options?

Post by Joe_R95 » Tue Feb 23, 2016 7:02 pm

Got a call from my accounting department today saying that they needed to pull some money out of my 401k and reissue my w2 because they were going to get in trouble and have to pay some kind of fine if they didn't. I only contributed $13k last year, but was on track to fully fund it this go round. Apparently they have a high percentage of high income earners contributing a lot, and a very low percentage of everyone else. This is kind of troubling news for my retirement planning because I was planning on fully funding it for another 10-15 years while working for this company. Not sure who would fine them. The 401k is through nationwide, but I assume it would be the govt fining them.

I have never heard of this before. Does anyone have any experience with this, or any idea what's actually going on here? I'll likely learn a bit more information about it tomorrow after I get a hold of my accountant to see if my taxes have been filed yet and can have a sit down with our accounting department. I just think its really odd because I should be able to contribute 18k.

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Not allowed to fully fund my 401k? Options?

Post by livesoft » Tue Feb 23, 2016 7:07 pm

Ah, the ol' HCE and failure of 401(k) to be fair to all employees.

Typically, an employer issues a check, but not a corrected W-2 since it is unnecessary. Search the forum for HCE and Form 1040 for how to fill out your tax return, but it is easy. For instance: viewtopic.php?t=110143

What can you do? Get the lesser paid employees to contribute more to their 401(k) accounts by having a better 401(k) plan. You know: more matching, lower expense ratios, more matching, great selection of funds, more matching, and more matching.

Or you can just invest tax efficiently in a taxable account after maxing your 401(k), your HSA, your Roth IRA, and so on.
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Joe_R95
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Re: Not allowed to fully fund my 401k? Options?

Post by Joe_R95 » Tue Feb 23, 2016 7:23 pm

Thank you. Our 401k sucks, and I'm sure most employees don't use it. The odds of them contributing more than the 2% matching, or making it better is pretty slim. I think I'm about as tax efficient as I can get, I just like the 401k to lower my taxable because without it I'd be bumping the next tax bracket. Looks like I'll be having more to contribute in my taxable accounts.

Who takes the loss on the investments when the market is down?

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jmndu99
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Re: Not allowed to fully fund my 401k? Options?

Post by jmndu99 » Tue Feb 23, 2016 9:38 pm

Hello OP,

I am guessing that you were funding a Traditional (pre-tax) 401k.

Since you are looking to not get to the next marginal tax rate, you could use the rest (18k - 13k = 5k) to fund a(n) (Traditional) IRA with Vanguard, then put the rest in taxable.

You can open/contribute to 2015 IRA until "Tax Day" this year.

Good luck

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dm200
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Location: Washington DC area

Re: Not allowed to fully fund my 401k? Options?

Post by dm200 » Tue Feb 23, 2016 9:43 pm

"Lobby" your employer to:
1. encourage lower income employees to participate in the 401k
2. default eligible employees to start a small participation as soon as eligible
3. fund employee 401ks unilaterally in an amount to eliminate this problem for higher income employees

danaht
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Joined: Sun Oct 18, 2015 11:28 am

Re: Not allowed to fully fund my 401k? Options?

Post by danaht » Wed Feb 24, 2016 3:13 pm

If you don't have good benefits (vacation, medical, etc.) - see if you can become a contractor instead of an employee. Then you can have your own individual 401k plan. Note: you would also need to negotiate a much higher rate to cover the additional FICA taxes (6%) + any lost benefits (sick + vacation time), etc.

traveltoomuch
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Re: Not allowed to fully fund my 401k? Options?

Post by traveltoomuch » Wed Feb 24, 2016 3:24 pm

Joe_R95 wrote: Does anyone have any experience with this, or any idea what's actually going on here?
It sounds like your plan failed it's "non-discrimination" or "top heavy" testing.

One way around it is for the company to make "safe harbor" contributions of either: 4% as a matching contribution (with a couple of different ways to dice this up) or a 3% contribution for all, whether or not they contribute.

Keep in mind that other senior and well-compensated people at your company are likely also feeling the same pain. That could include the managers who could decide to move to a safe harbor plan. Maybe some collective lobbying is in order.

Joe_R95
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Re: Not allowed to fully fund my 401k? Options?

Post by Joe_R95 » Wed Feb 24, 2016 7:33 pm

Thanks guy's. My company is smaller and will probably never vary from their 2% max for 4% contribution. Its been that way for the 14 years I've worked there, except for the years when they stopped matching. I think my only real option is to reduce my contribution so I don't get smacked on the nose again. Looks like I'm getting about $6000 back, and my understanding is I'll get a 1099R and send about half back to the IRS.

There's only one other person that has this issue at my location. They have to refund about $50k total so there aren't a lot of people in my boat. They don't allow any contributions until you've been employed for a year and that's probably whats killing it.

Spirit Rider
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Re: Not allowed to fully fund my 401k? Options?

Post by Spirit Rider » Wed Feb 24, 2016 7:43 pm

Joe_R95 wrote:Thanks guy's. My company is smaller and will probably never vary from their 2% max for 4% contribution. Its been that way for the 14 years I've worked there, except for the years when they stopped matching. I think my only real option is to reduce my contribution so I don't get smacked on the nose again. Looks like I'm getting about $6000 back, and my understanding is I'll get a 1099R and send about half back to the IRS.

There's only one other person that has this issue at my location. They have to refund about $50k total so there aren't a lot of people in my boat. They don't allow any contributions until you've been employed for a year and that's probably whats killing it.
They would only have to increase their match to 100% of first 3% and 50% of the next 2% for a total of 4% I a safe harbor plan.

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FelixTheCat
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Re: Not allowed to fully fund my 401k? Options?

Post by FelixTheCat » Wed Feb 24, 2016 7:48 pm

Invest what is allowed in your 401K for your bond portion. Invest the rest in a tax efficient portfolio of Vanguard Total Stock Market Index and Vanguard Total International Index.

As a side project, get HR to improve the 401K.
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cherijoh
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Location: Charlotte NC

Re: Not allowed to fully fund my 401k? Options?

Post by cherijoh » Wed Feb 24, 2016 8:10 pm

dm200 wrote:"Lobby" your employer to:
1. encourage lower income employees to participate in the 401k
2. default eligible employees to start a small participation as soon as eligible
3. fund employee 401ks unilaterally in an amount to eliminate this problem for higher income employees
My employer meets the "Safe Harbor" guidelines so I don't have to worry about that problem. Thank Goodness! A company can either offer a more generous match OR unilaterally fund the 401k (i.e., #3 in dm200's post) to meet the safe harbor guidelines.

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