Warning: Max out 401k early - lose some of the match

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Topic Author
krick
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Warning: Max out 401k early - lose some of the match

Post by krick »

I discovered a problem with the way my employer handles their 401k matching. My employer matches 50 cents of each dollar you contribute, up to 4% of your salary (effectively a 2% match), with a $2500 maximum match. They dole out the match per pay period. So if you contribute 4% or more, you get the full match spread out over 26 pay periods.

The problem is when you try to contribute the maximum ($18,000 in my case). They require that you specify the contribution in "whole percentages". If I had elected to contribute 18% last year, I would have come up short of the $18,000 max. So I elected to contribute 19% instead. They won't let you over-contribute so as soon as you hit the limit, your contributions stop. In my case, my last contribution was the first pay period in December. The second pay period in December, since there was no contribution from me, there was no matching contribution from my employer. This resulted in me being "shorted" one matching contribution in 2016.

So even though I contributed $18,000 in both 2015 and 2016, the total company match I received in 2016 was actually less than in 2015. I also got a raise in 2016, which should have made the match even higher because my salary was higher.

I raised the issue with my employer's HR benefits group and they dismissed my concerns several times as "works as designed" but I became a "squeaky wheel" and kept escalating it up the chain until they finally acknowledged that there actually is a problem. This is from the final email I received from them...
You are correct in your calculations below. [The Company] is aware of this and is working diligently with internal departments to find an appropriate change that is feasible from a systems perspective. As you know, these types of changes that touch a members pay must be looked at closely and ensure that there is no negative impact to the member.

Members will be advised of any change or decision made regarding this. At this time, our plan documents and systems are currently calculating the match as per below. We hope to find a suitable way to address this in the coming months. Please keep your eyes open for any communication that may be coming up this year regarding this concern.
I understand why they want to spread out the matching contribution per pay period. They don't want someone to be able to use a really high contribution rate to get all of their match in the first few months of the year. It's better for the company cash flow if their payout is spread out evenly throughout the year. The problem is that their implementation falls down for employees who are trying to contribute the maximum.

Is there anything else I can do? Does this violate any kind of IRS rules if they claim to match (effectively) 2%, but fail to do so?
juventussoccr
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Re: Warning: Max out 401k early - lose some of the match

Post by juventussoccr »

The actuary that is in charge of the plan does a final calculation at the end of the year usually and reconciles it with the actual payments. Then, they report it on the 5500. Sounds like someone dropped the ball in that department.
Mitchell777
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Re: Warning: Max out 401k early - lose some of the match

Post by Mitchell777 »

My employer does the same. My earnings vary based on bonus and I need to review it toward the mid to end of the year every year. I don't like it and never understood the need for doing it that way - seems a work-around should be possible since my other employer did not do this.
ved
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Re: Warning: Max out 401k early - lose some of the match

Post by ved »

Can't you change your contribution % during the year?
So, say, go with 17% until say October or so, and then change it to 19 or 20% for the rest to get to the last pay check.
Or, in late November, change the contribution to 10% to see if you can contribute in your last paycheck.
You may have to play with the numbers a little to hit the sweet spot.
Longdog
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Re: Warning: Max out 401k early - lose some of the match

Post by Longdog »

My MegaCo's plan has a true-up feature that corrects for this sometime in the middle of the following year. It's a problem that has been solved many times by many companies!
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ByThePond
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Re: Warning: Max out 401k early - lose some of the match

Post by ByThePond »

I got caught this way once. My employer does not "true up" at year's end, and I lost out on about 1/24th of my match. Now I have 24 equal bimonthly deductions taken.
Topic Author
krick
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Re: Warning: Max out 401k early - lose some of the match

Post by krick »

ved wrote:Can't you change your contribution % during the year?
So, say, go with 17% until say October or so, and then change it to 19 or 20% for the rest to get to the last pay check.
Or, in late November, change the contribution to 10% to see if you can contribute in your last paycheck.
You may have to play with the numbers a little to hit the sweet spot.
You can change your contribution percentage during the year, but there's at least a 2 week delay between the time you request it on the 401k website and the time the payroll system actually puts the change into effect. So the timing is tricky.
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krick
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Re: Warning: Max out 401k early - lose some of the match

Post by krick »

ByThePond wrote:I got caught this way once. My employer does not "true up" at year's end, and I lost out on about 1/24th of my match. Now I have 24 equal bimonthly deductions taken.
We are only allowed to specify the contribution in whole percentages so depending on your total salary, you may have to choose between hitting the $18,000 maximum or getting the full company match. If we could specify a dollar amount instead of a percentage, this wouldn't be a problem.
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Phineas J. Whoopee
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Re: Warning: Max out 401k early - lose some of the match

Post by Phineas J. Whoopee »

Pending a better employer system, here's what I've done under similar circumstances, with a percentage match per paycheck, no true up, and aiming at the maximum contribution. It does rely, as an earlier poster asked, on being able to change the withholding percentage during the year, and must be recalculated along the way if one's pay increases (or decreases).

1) Calculate the dollars I need to contribute from each paycheck to get the whole match, and round that up to a whole percent.

2) Subtract the contributions aimed at getting the match from the maximum contribution.

3) Work out how I can contribute most but not all of the remainder in early paychecks.

4) To clean up the rounding errors, set the percentage very high for the last paycheck.

It's work but it works.

PJW
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inmymind
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Re: Warning: Max out 401k early - lose some of the match

Post by inmymind »

This happened to me the first year at my current employer. Luckily, I received a letter stating that they were doing the true-up and I received what I was due, but it is my understanding that this is not a requirement and not all companies perform a true-up.

If I were you OP, I would just check this midway through the year, or after all bonuses have hit, then make the necessary adjustment to your percentage.
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ERISA Stone
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Re: Warning: Max out 401k early - lose some of the match

Post by ERISA Stone »

I don't like it but I don't think there's anything you can do. A lot of plans are written to match on a pay period basis, and requiring a whole percentage deferral amount is an acceptable administrative election.

I honestly don't know why companies can't just implement a true-up at year end.
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Earl Lemongrab
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Re: Warning: Max out 401k early - lose some of the match

Post by Earl Lemongrab »

In my case, MegaCorp switches contributions to after-tax when the 18k limit is reached, and they will match those. So I'm able to just set it to the max contribution rate (30%) and let it ride. I get full match and can roll the after-tax out for a Mega Backdoor move.
livesoft
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Re: Warning: Max out 401k early - lose some of the match

Post by livesoft »

401(k) custodians offer the "true-up" feature for plans, so the employer doesn't have to do any thinking about it. That way, HR folks don't have to do thinking either and it makes them look good. The custodian may charge an added fee for this service. Furthermore, the company might get hit with a large expense if it turns out that many employees are eligible for the true-up.

I can relate the experience of my spouse's 401(k) plan: It is practically impossible to get the full possible match because of 2 extra payments that occur in late December. Those extra payments are a holiday bonus and a year-end bonus. Don't ask me why there are two bonus checks. But 401(k) contributions come out of both checks.

Since the bonus check can amount to a full month or two salary but is absolutely unknown until posted, the path to full match for the year is a tricky one between two bad outcomes. The problem is that if one reserves enough underpayment of 401(k) contribution for this check …

1. If the bonus is large, then that maxes out 401(k) for the year and the last paycheck of the year will get no 401(k) contribution and no match, or

2. If the bonus is small, then that contribution is too small, so that even if 100% of the final paycheck of the year went into the 401(k) it is under the $18K/$24K deferral limit.

That fact that more employees don't complain suggests that many employees do not contribute the max and some that do cannot do math.
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jhfenton
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Re: Warning: Max out 401k early - lose some of the match

Post by jhfenton »

I have the same issue, but until I ran across discussions on here, I wasn't aware that any companies did a true up. I've always assumed it was my responsibility to manage, because it always has been. And with quarterly bonuses that vary slightly based on company results, I won't know if I needed 16.2% or 16.6% (for example) until after the fact (but at least our bonuses are quarterly in Feb-May-Aug-Nov and range-bound). I just make sure I'm close, see where I am at the start of Q4, lower it a bit if necessary for a few paychecks and then bump it up the last paycheck if necessary. (I'm fortunate that Fidelity and our payroll are very quick at communicating changes in deferral elections.)
BW1985
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Re: Warning: Max out 401k early - lose some of the match

Post by BW1985 »

My company won't 'true up' either :oops: , otherwise I would max it out as early as possible in the year. Instead I just have to watch my paychecks near the end of the year and adjust up or down to ensure the required % is contributed for matching.
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curmudgeon
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Re: Warning: Max out 401k early - lose some of the match

Post by curmudgeon »

Far more annoying, my company won't "true up" AND won't match the over 50 "catch up" contributions. So if you just set an even contribution throughout the year, the company match stops around end of September.
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krick
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Re: Warning: Max out 401k early - lose some of the match

Post by krick »

curmudgeon wrote:my company won't "true up" AND won't match the over 50 "catch up" contributions.
So when you hit $18,000 in September the company matching stops even though your contributions continue through the end of the year? That sounds like a bug in their payroll software or something. Are you sure you're not hitting some other kind of match cap?
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fourwedge
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Re: Warning: Max out 401k early - lose some of the match

Post by fourwedge »

same here, I max out to stay just below. I usually get within $20 of the 18K and spread it out over every pay period to make sure they match every pay period.
Max out your tax sheltered retirement accounts with inexpensive, well diversified, index funds and you will beat 90% of all investors.
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Earl Lemongrab
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Re: Warning: Max out 401k early - lose some of the match

Post by Earl Lemongrab »

krick wrote:
curmudgeon wrote:my company won't "true up" AND won't match the over 50 "catch up" contributions.
So when you hit $18,000 in September the company matching stops even though your contributions continue through the end of the year? That sounds like a bug in their payroll software or something. Are you sure you're not hitting some other kind of match cap?
MegaCorp doesn't match catch-up either. You have to have some other contributions to get matching. I don't know why.
bdpb
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Re: Warning: Max out 401k early - lose some of the match

Post by bdpb »

Earl Lemongrab wrote:
krick wrote:
curmudgeon wrote:my company won't "true up" AND won't match the over 50 "catch up" contributions.
So when you hit $18,000 in September the company matching stops even though your contributions continue through the end of the year? That sounds like a bug in their payroll software or something. Are you sure you're not hitting some other kind of match cap?
MegaCorp doesn't match catch-up either. You have to have some other contributions to get matching. I don't know why.
Know someone in a similar situation but also has additional variables that make it more complicated. Bonus gets paid near the end of the year, sometimes October, sometimes November and is variable amount. In addition, there is an additional compensation payment to be made at the end of the year. Of course, this payment has only occurred in the current year once in the last three years (in January the other two years). Another caveat is that catch-up contributions can't occur the same pay period as the final 18k contribution. Must wait until next pay period to start catch-up contributions.
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Re: Warning: Max out 401k early - lose some of the match

Post by Good Listener »

Repetitious.
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Choy
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Re: Warning: Max out 401k early - lose some of the match

Post by Choy »

My company also doesn't true up, works by percentage and allocates matches per pay period. Fortunately updating my contribution elections is very fast online, so I contribute enough for the max match without going over $18K for the year and then after the 23rd paycheck immediately up my contribution to max out $18K in the last pay check.

Thankfully, as of this year, my company now lets us specify dollar amounts instead of percentages!
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Re: Warning: Max out 401k early - lose some of the match

Post by curmudgeon »

krick wrote:
curmudgeon wrote:my company won't "true up" AND won't match the over 50 "catch up" contributions.
So when you hit $18,000 in September the company matching stops even though your contributions continue through the end of the year? That sounds like a bug in their payroll software or something. Are you sure you're not hitting some other kind of match cap?
It is pretty annoying. If I want to optimize it, I have to hold the contributions fixed for 11 months, then crank up for the last pay period. Without reliable timing on when the change will hit, it is a bit of a guessing game. I've taken the issue up as high as the CEO, to no effect. I do plan to raise it again in my exit interview, though :twisted: maybe it will get more attention that way.
spammagnet
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Re: Warning: Max out 401k early - lose some of the match

Post by spammagnet »

krick wrote:That sounds like a bug in their payroll software or something. Are you sure you're not hitting some other kind of match cap?
It's not necessarily a bug if the company doesn't include truing up in their policy.
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Re: Warning: Max out 401k early - lose some of the match

Post by spammagnet »

My wife's Megacorp requires distinguishing between the first 18K and the 6K over-55 catch-up. We were unaware of that requirement. They refunded $1,000 as ineligible. One would think they'd just consider it an aggregate $24K amount but they wouldn't.
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Uncle Pennybags
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Re: Warning: Max out 401k early - lose some of the match

Post by Uncle Pennybags »

OP, you are not a represented employee are you? A represented employee would never have this problem. :greedy
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rob
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Re: Warning: Max out 401k early - lose some of the match

Post by rob »

The whole thing is a mess... If I didn't know it was all HR apathy I would think the companies do this to avoid matching.

My new company does a percentage on the regular and a specific dollar amount on the catch-up :? I have not figured out if the match is on both or just the regular... which is what I suspect. The bonus is that for the first time in my life... this one has a true-up.
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cherijoh
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Re: Warning: Max out 401k early - lose some of the match

Post by cherijoh »

ved wrote:Can't you change your contribution % during the year?
So, say, go with 17% until say October or so, and then change it to 19 or 20% for the rest to get to the last pay check.
Or, in late November, change the contribution to 10% to see if you can contribute in your last paycheck.
You may have to play with the numbers a little to hit the sweet spot.
+1 OP - unless your plan doesn't let you change your contribution more than once a year, this is a non-issue as long as you are you are paying attention.

Now people who get a bonus late in the year could have a real issue if their plan automatically takes the regular 401k % contribution out of the bonus too. I don't think there is a work around for that if their company doesn't do true up matching. Fortunately for me (at least from the 401k perspective) we get our bonuses in Feb for the prior year (after performance review time). So I have plenty of time to adjust my contribution limits.
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Re: Warning: Max out 401k early - lose some of the match

Post by blaugranamd »

I'm worried TSP will do this when BRS is implemented. It drives me nuts that, like you, I have to elect a percentage of my pay per period rather than simply a fixed dollar amount that can easily be calculated in advance. My pay rate increases in the middle of the year too...
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Re: Warning: Max out 401k early - lose some of the match

Post by Jags4186 »

If it makes you feel any better my company decided without notice not to withhold 401k contributions on bonuses and I lost $1000 in match vs years past. When I asked about it I was told to be grateful I got a bonus and to stop causing problems.
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Re: Warning: Max out 401k early - lose some of the match

Post by rob »

Jags4186 wrote:If it makes you feel any better my company decided without notice not to withhold 401k contributions on bonuses and I lost $1000 in match vs years past. When I asked about it I was told to be grateful I got a bonus and to stop causing problems.
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katnok
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Re: Warning: Max out 401k early - lose some of the match

Post by katnok »

Krick,

That's exactly hpw our 403b works.
No true-up. Contribution rate has to be a whole percentage point. And we can not do a dollar amount.

I brought it up with our HR, but was told they were not going to change any of that.

What I do is, contribute the minimum to get the maximum match until sometime around September, when I bump it up so I can still contribute $18k. We can change the contribution rate once a month, if desired. This past year, I had to tweak it a couple of times to contribute the max, and get the max employer match.
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krick
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Re: Warning: Max out 401k early - lose some of the match

Post by krick »

katnok wrote: Fri Jan 27, 2017 9:22 pm No true-up. Contribution rate has to be a whole percentage point. And we can not do a dollar amount.
That's the thing I don't understand. If they aren't going to have a true-up provision, why do they not allow you to choose a dollar amount or set your contribution rate using fractional percentage points.

When I first started at this company, the 401k provider was Transamerica Retirement Solutions. Their user interface let you set the contribution percentage in tenths of of a percent. Though the 401k plan documents specifically said that you had to choose whole percentages. There doesn't seem to be any valid reason for requiring a whole percentage.
BigJohn
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Re: Warning: Max out 401k early - lose some of the match

Post by BigJohn »

My Mega-Corp 401k worked exactly the same way with only whole percentages and no true-up, even for represented employees. The had warning language in big bold letters about the issue so no one could claim ignorance. I handled by undershooting percentage of annual contributions and doing the true-up myself with a lump sum contribution in mid-December. I usually hit it on the money but if I went over they would send me a check for the small overage in January.
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Re: Warning: Max out 401k early - lose some of the match

Post by InvestorThom »

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merdahl
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Re: Warning: Max out 401k early - lose some of the match

Post by merdahl »

The outfit I work for does a 50% match on up to 10% of your earnings. The match goes in once a year in the form of company stock. While I don't have the issue described in this thread I think this is kind of weird.
boglebill2015
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Re: Warning: Max out 401k early - lose some of the match

Post by boglebill2015 »

I have been a plan admin for 401K. Here's my knowledge/experience

1) the Company choses how to match, by period or by year when they set up their 401K plan. Its in the plan documents. They cannot just do a "system change" and fix it. They have to follow the plan documents. Those plan docs can be changed of course.

Its quite a bit of work to calculate the true up at the end of the year (ask me how I know). Its a lot simpler to do monthly match. That's why companies chose it and its less cash out of pocket.
LOLC2k
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Re: Warning: Max out 401k early - lose some of the match

Post by LOLC2k »

One thing you COULD do (if you really want to make sure you hit the 18k) is do a side job and make a few thousand dollars. Open a solo 401k, and contribute whatever you didn't at your job to the employee side in January after you know what you contributed. Don't lose the match, I'm saying to shoot to, if anything, undercontribute. You can put in the difference from these earnings (plus 20% into employer side as a bonus). It's not perfect, you'll need to pay some FICA taxes and state and local on it, but will basically guarantee you to get there.

Depending on how wild those "bonus" swings are, you might only need to make a few hundred dollars in the side hustle.
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Phineas J. Whoopee
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Re: Warning: Max out 401k early - lose some of the match

Post by Phineas J. Whoopee »

boglebill2015 wrote: Fri Mar 30, 2018 1:15 am ...
Its quite a bit of work to calculate the true up at the end of the year (ask me how I know). Its a lot simpler to do monthly match. That's why companies chose it and its less cash out of pocket.
OK, I'll bite. How do you know?

PJW
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Re: Warning: Max out 401k early - lose some of the match

Post by LOLC2k »

Phineas J. Whoopee wrote: Fri Mar 30, 2018 11:45 am
boglebill2015 wrote: Fri Mar 30, 2018 1:15 am ...
Its quite a bit of work to calculate the true up at the end of the year (ask me how I know). Its a lot simpler to do monthly match. That's why companies chose it and its less cash out of pocket.
OK, I'll bite. How do you know?

PJW

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Leemiller
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Re: Warning: Max out 401k early - lose some of the match

Post by Leemiller »

Earl Lemongrab wrote: Fri Jan 27, 2017 3:20 pm In my case, MegaCorp switches contributions to after-tax when the 18k limit is reached, and they will match those. So I'm able to just set it to the max contribution rate (30%) and let it ride. I get full match and can roll the after-tax out for a Mega Backdoor move.
I need to figure this out for my new job. How hard was it to get HR to confirm you could do this? Is there a way to figure it out yourself?
spammagnet
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Re: Warning: Max out 401k early - lose some of the match

Post by spammagnet »

Leemiller wrote: Sun Apr 01, 2018 10:46 amI need to figure this out for my new job. How hard was it to get HR to confirm you could do this? Is there a way to figure it out yourself?
Send an email to your benefits coordinator? That's how I confirmed my organization does not allow post-tax contributions in excess of the individual annual limit.
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beyou
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Re: Warning: Max out 401k early - lose some of the match

Post by beyou »

My employer pays match at end of the year on one lump sum. No issues.
youngpleb
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Re: Warning: Max out 401k early - lose some of the match

Post by youngpleb »

My company does the same thing, matching on a per-paycheck basis. Luckily (errr...?) I don’t make enough money to encounter your problem when I max out my 401k. :sharebeer
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Earl Lemongrab
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Re: Warning: Max out 401k early - lose some of the match

Post by Earl Lemongrab »

Leemiller wrote: Sun Apr 01, 2018 10:46 am
Earl Lemongrab wrote: Fri Jan 27, 2017 3:20 pm In my case, MegaCorp switches contributions to after-tax when the 18k limit is reached, and they will match those. So I'm able to just set it to the max contribution rate (30%) and let it ride. I get full match and can roll the after-tax out for a Mega Backdoor move.
I need to figure this out for my new job. How hard was it to get HR to confirm you could do this? Is there a way to figure it out yourself?
In my case, it was laid out in the plan documents.
boglebill2015
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Re: Warning: Max out 401k early - lose some of the match

Post by boglebill2015 »

Phineas J. Whoopee wrote: Fri Mar 30, 2018 11:45 am
boglebill2015 wrote: Fri Mar 30, 2018 1:15 am ...
Its quite a bit of work to calculate the true up at the end of the year (ask me how I know). Its a lot simpler to do monthly match. That's why companies chose it and its less cash out of pocket.
OK, I'll bite. How do you know?

PJW
From calculating it with a spreadsheet. We chose to match at paycheck, with a year end true up. The data required to do the true up comes from both the payroll provider and the 401K provider. Its took a good 3 or 4 hours to do correctly, as people change their rate thru the year, so some "should" have less than the "max", while for others we needed to true up.
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