Kitces article - coordinating multiple defined contribution plans

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Twood
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Joined: Sun Nov 06, 2016 12:15 am

Kitces article - coordinating multiple defined contribution plans

Post by Twood » Fri Nov 09, 2018 12:20 am

This topic comes up periodically on this board, and yesterday Michael Kitces published a very readable article, including examples, of coordinating multiple defined contribution plans. https://www.kitces.com/blog/coordinatin ... d-benefit/ I hope others find it useful.

Spirit Rider
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Re: Kitces article - coordinating multiple defined contribution plans

Post by Spirit Rider » Fri Nov 09, 2018 1:50 am

Readable it is not. He meanders all over the place. It is probably 5X - 10X longer than it needs to be and this comes from someone who is not known to be concise themselves. With all that verbosity he has glaring omissions of fairly common, but crucial Defined Contribution multiple plan aggregation requirements:
  1. 401a plan employee pre-tax contributions are considered mandatory contributions and are not considered employee elective contributions subject to the 402g employee elective contribution limit (2018 = $18.5K).
  2. 403b plans are considered controlled by the participant. This results in two interesting multiplan annual addition aggregation requirements.
    1. 403b plan's annual additions are not aggregated with those of a 401a plan or 401k plan of the same employer for purposes of the 415c annual addition limit (2018 = $55K).
    2. 403b plan's annual additions are aggregated with those of employer retirement plans of businesses > 50% owned by the 403b participant for purposes of the 415c annual addition limit (2018 = $55K)./list]

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teen persuasion
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Re: Kitces article - coordinating multiple defined contribution plans

Post by teen persuasion » Fri Nov 09, 2018 9:37 am

I found Kitces's description of how the catchup contributions worked to be interesting, and counter to how it worked at DH's previous employer. I'd assumed that after reaching age 50 DH simply had a larger maximum contribution limit. His employer, however, split the contribution option into 2 parts: contribution and catchup. You had to designate a % for each. So rather than contribute 55% up to $18500 first, and then switch to contributing 55% to the catchup bucket, you could put 45% to contributions and 10% to catchup from payroll #1. You could do it my way (fill one bucket first, then the other bucket), but you had to time the manual switch of destination to get it right, or you just got cut off and/or missed contributing (and matching - no true up) for a bit. Mid-year raises threw off percentages set early, too. I found it a needlessly cumbersome system.

If Kitces's understanding is correct, then treating the catchup as a separate portion you can designate and contribute to before reaching the annual regular maximum wouldn't be correct (especially if splitting contributions across 2 employers' plans - neither exceeds the max, so never uses the catchup bucket).

feehater
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Re: Kitces article - coordinating multiple defined contribution plans

Post by feehater » Fri Nov 09, 2018 9:45 am

Spirit Rider wrote:
Fri Nov 09, 2018 1:50 am
  1. 401a plan employee pre-tax contributions are considered mandatory contributions and are not considered employee elective contributions subject to the 402g employee elective contribution limit (2018 = $18.5K).
I just learned (while rolling things into the TSP) that the TSP is technically a 401a plan. Surely this doesn't mean that elective contributions into the TSP aren't subject to the 402g limit?

bradpevans
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Re: Kitces article - coordinating multiple defined contribution plans

Post by bradpevans » Fri Nov 09, 2018 9:49 am

teen persuasion wrote:
Fri Nov 09, 2018 9:37 am
I found Kitces's description of how the catchup contributions worked to be interesting, and counter to how it worked at DH's previous employer. I'd assumed that after reaching age 50 DH simply had a larger maximum contribution limit. His employer, however, split the contribution option into 2 parts: contribution and catchup. You had to designate a % for each. So rather than contribute 55% up to $18500 first, and then switch to contributing 55% to the catchup bucket, you could put 45% to contributions and 10% to catchup from payroll #1. You could do it my way (fill one bucket first, then the other bucket), but you had to time the manual switch of destination to get it right, or you just got cut off and/or missed contributing (and matching - no true up) for a bit. Mid-year raises threw off percentages set early, too. I found it a needlessly cumbersome system.

If Kitces's understanding is correct, then treating the catchup as a separate portion you can designate and contribute to before reaching the annual regular maximum wouldn't be correct (especially if splitting contributions across 2 employers' plans - neither exceeds the max, so never uses the catchup bucket).
FWIW, my megacorp / Fidelity 401k splits the 18500 / 6000 into two different buckets
So it does impact the percentages. I wish the system had an option to "fill the bucket by the time the last paycheck arrives". My employer does NOT do a 'true-up', so filling the buckets before year end loses matching

Spirit Rider
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Re: Kitces article - coordinating multiple defined contribution plans

Post by Spirit Rider » Fri Nov 09, 2018 12:07 pm

The use of separate contribution buckets for employee elective contributions and catch-up contributions is purely for determining employer matching when there is no "true-up".

IRS regulations treat only the amount > the 402g employee elective contribution limit on 12/31 as catch-up contributions. What contribution bucket was used during the year is irrelevant for actually determining the employee elective and catch-up contributions.

There is no need to exactly reach the 402g limit for the year. Any excess amount will be considered catch-up contributions if eligible. To ensure you reach the max employee elective contribution with maximum match with no true-up and maximum catch-up contribution, just ensure the last pay period has enough contribution for the match.

For example: $100K salary, 26 pay periods ~= $3846.15/pay period, match on 5% of salary, 19% employee elective contribution = ~$730.77/pay period, $18,500 - (25 * $730.77 = $18,26925) = $230.75 for pay period 26, $230.75 / $3846.15 = ~6%, max $18,500 employee elective contribution and maximum match. Any excess will be applied as catch-up contributions.

Spirit Rider
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Re: Kitces article - coordinating multiple defined contribution plans

Post by Spirit Rider » Fri Nov 09, 2018 12:32 pm

feehater wrote:
Fri Nov 09, 2018 9:45 am
Spirit Rider wrote:
Fri Nov 09, 2018 1:50 am
  1. 401a plan employee pre-tax contributions are considered mandatory contributions and are not considered employee elective contributions subject to the 402g employee elective contribution limit (2018 = $18.5K).
I just learned (while rolling things into the TSP) that the TSP is technically a 401a plan. Surely this doesn't mean that elective contributions into the TSP aren't subject to the 402g limit?
I don't know where you heard that, but the TSP is most definitely not a 401a plan. The TSP is a qualified cash or deferred arrangement with profit sharing, AKA a 401k plan. The fact that we use a section and subsection of the IRC to label plans does not mean they are only subject to that subsection.

26 U.S. Code § 401 - Qualified pension, profit-sharing, and stock bonus plans, (a) Requirements for qualification.
A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section

A non-union 401k is subject to 401 a-d, f-g and j-o. As well as, sections 402, 402A, 404, 410-411, 414-417 and other sections of the IRC.

In summary a 401k plan is subject to subsection 401a, but a 401a plan is not subject to subsection 401k, because it is not a cash or deferred arrangement and pre-tax employee contributions are mandatory contributions upon enrollment.

feehater
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Re: Kitces article - coordinating multiple defined contribution plans

Post by feehater » Fri Nov 09, 2018 3:14 pm

Spirit Rider wrote:
Fri Nov 09, 2018 12:32 pm
feehater wrote:
Fri Nov 09, 2018 9:45 am
Spirit Rider wrote:
Fri Nov 09, 2018 1:50 am
  1. 401a plan employee pre-tax contributions are considered mandatory contributions and are not considered employee elective contributions subject to the 402g employee elective contribution limit (2018 = $18.5K).
I just learned (while rolling things into the TSP) that the TSP is technically a 401a plan. Surely this doesn't mean that elective contributions into the TSP aren't subject to the 402g limit?
I don't know where you heard that, but the TSP is most definitely not a 401a plan. The TSP is a qualified cash or deferred arrangement with profit sharing, AKA a 401k plan. The fact that we use a section and subsection of the IRC to label plans does not mean they are only subject to that subsection.

26 U.S. Code § 401 - Qualified pension, profit-sharing, and stock bonus plans, (a) Requirements for qualification.
A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section

A non-union 401k is subject to 401 a-d, f-g and j-o. As well as, sections 402, 402A, 404, 410-411, 414-417 and other sections of the IRC.

In summary a 401k plan is subject to subsection 401a, but a 401a plan is not subject to subsection 401k, because it is not a cash or deferred arrangement and pre-tax employee contributions are mandatory contributions upon enrollment.
Thanks for the explanation. I was tripped up by the line in the TSP-60 form which describes it as this:

The TSP is a retirement savings and investment plan for Federal
employees and members of the uniformed services. Congress
established the TSP in the Federal Employees’ Retirement System
Act of 1986. The TSP is to be treated as a trust described
in 26 U.S.C. § 401(a), which is exempt from taxation under 26
U.S.C. § 501(a).

But I knew that it was in all other respects like a 401k which was why I was confused.

Thanks as always for your expertise, Spirit Rider.

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Earl Lemongrab
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Re: Kitces article - coordinating multiple defined contribution plans

Post by Earl Lemongrab » Fri Nov 09, 2018 4:53 pm

One of Megacorp's plan features was a limit on contributions. The basic limit for employee deferrals+Roth+after-tax was 30% of salary. Catch-up had a separate limit of 50% of salary. As I was retiring early in 2018, I went ahead and put the max in catch-up even though I knew I wouldn't get anywhere near the deferral limit. However, I ended up with extra in the plan for the year as the catch-up will be counted as deferrals. It helps to read the rules. I was one of the few people I'd talked to there that had ever even looked at the SPD, let alone gone over it end-to-end.

There are many plan particulars. For instance, Megacorp matched after-tax contributions (and supported Mega Backdoor). So if you had a side business with a solo plan, you'd be better off putting all of the latter (at least what you could) into deferrals or Roth, then after-tax at Megacorp. You'd get the same match and an overall increase in what you put into tax-advantaged.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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