401(k) Matching Formula Question

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CaptainMarvel
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401(k) Matching Formula Question

Post by CaptainMarvel » Wed Feb 20, 2019 12:40 pm

My employer matches our 401(k) plan contributions. The formula is described as: "The company matches 100% of the first 3% of eligible pay an employee contributes per pay period." I max out my 401(k) employee contributions every year. We are paid bi-weekly, with a total of 26 paychecks for the year.

For a number of years, I've hit the maximum for my 401(k) plan employee contributions (i.e., $18,000 or $18,500) at or around late August. With inertia, I've never gotten around to changing my bi-weekly contribution percentage to lower it so that my plan contributions are evenly spread out throughout the year. I was under the impression that it wouldn't matter whether I maxed out my employee contributions in August vs. spreading them out equally throughout the year, since either way, 3% of the maximum total employee contribution (this year, $19,000) would be the same either way - regardless of whether that 3% employer match occurs Jan.-August or Jan.-December. In other words, I thought that 3% of $19,000 is the same amount regardless of the timing of the employee contributions.

Am I correct, or does the math work differently for purposes of maximizing my employer's 3% match?

Thank you.

02nz
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Re: 401(k) Matching Formula Question

Post by 02nz » Wed Feb 20, 2019 12:45 pm

Only your HR can answer that definitely. Based on the formula you quoted, you would lose out (and have been losing out!) on matching for pay periods after you reach your contribution limit. Some employers provide a "true-up" that gives you a full match regardless of whether/when you hit the contribution limit, but if yours doesn't, then change your contributions pronto to spread it out evenly.

sailaway
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Re: 401(k) Matching Formula Question

Post by sailaway » Wed Feb 20, 2019 12:46 pm

The wording you put up specifically states that they match up to 3% PER PAY PERIOD. If you are contributing more than 3% of any given paycheck, then it will not all be matched. The wording you put up does not mention any true up that allows for 3% of your total salary, no matter when you contribute. As such, it would be best to spread your 401k contributions out such that you come as close as possible to 3% each pay period.

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cheese_breath
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Re: 401(k) Matching Formula Question

Post by cheese_breath » Wed Feb 20, 2019 12:49 pm

Delete.
Last edited by cheese_breath on Wed Feb 20, 2019 12:51 pm, edited 1 time in total.
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nolesrule
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Re: 401(k) Matching Formula Question

Post by nolesrule » Wed Feb 20, 2019 12:50 pm

That wording indicates the match is per pay period.

Also, it's not 3% of $19,000. It's a 100% match on a contribution of up to 3% of your pay for that period. If you contribute 3% or more, they match the 100% of 3%. If you contribute 2%, they match 100% of 2%. If you contribute 0%, they match 100% of 0%.

The only way you would get the full match would be to contribute with every paycheck at least 3%, unless they have a true-up provision.

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Epsilon Delta
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Re: 401(k) Matching Formula Question

Post by Epsilon Delta » Wed Feb 20, 2019 2:08 pm

Since you have been doing this for a number of years you can easily check. Get last years statements, add up the match and see if it is 3% of your years salary or 3% of your Jan-Aug salary.

After you've done that you will probably want to change your contributions so that you contribute at least 3% in each pay period.

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RickBoglehead
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Re: 401(k) Matching Formula Question

Post by RickBoglehead » Wed Feb 20, 2019 2:11 pm

Seems pretty clear that you've lost that 3% match for at least 4 months of the year for every year you've maxed out early.
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lakpr
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Re: 401(k) Matching Formula Question

Post by lakpr » Wed Feb 20, 2019 2:24 pm

My previous employer did this: match 3% on a 6% contribution, on a per paycheck basis. We were paid twice-monthly; 24 paychecks. To not lose out on the match, I worked out a spreadsheet like below.

Amount needed to contribute on a per paycheck basis to get maximum employer match: $340
Total amount per year dedicated to maximize employer match = 340 * 24 = $8160
Max amount you can contribute for this year (2017) = $17000
Amount remaining = $17000 - $8160 = $8840
Additional amount per paycheck = $8840/24 = $368.33, which is 6.5%
So set my deferral percentage = 6% (to get employer match) + 6.5% (to max out 401k limit) = 12.5% per paycheck.
Or, defer $340 + $368 = $768 per paycheck

My employer allowed me to defer only whole percentages (10% or 11%, but not 10.5%). So for the first 6 months I used to defer 12%, and once June 30th paycheck is paid, up my 401k deferral to 13% per paycheck online. Redo the above calculations for the next year, and so on ...

Aak732
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Re: 401(k) Matching Formula Question

Post by Aak732 » Wed Feb 20, 2019 5:06 pm

nolesrule wrote:
Wed Feb 20, 2019 12:50 pm
The only way you would get the full match would be to contribute with every paycheck at least 3%, unless they have a true-up provision.
What nolesrule stated earlier. I think that more than likely you have a "true-up provision". Which means if you max out the Pre-tax contribution in August and stay the entire year with the present employer, they more than likely will deposit the remainder of the 3% matching into the 401(k) at the last pay period. But as the others have stated, why rush to deposit the monies when you can evenly spread out the payments throughout the year.

Also, ask your employer if they allow after-tax payments once the Pre-tax has been exhausted (if you are interested in this...). That way you get the matching 3% put into your account per pay period, and you get to add additional money growing tax-free. (Although, with the after-tax payments you will have less take-home pay during those periods).

sailaway
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Re: 401(k) Matching Formula Question

Post by sailaway » Wed Feb 20, 2019 5:12 pm

Aak732 wrote:
Wed Feb 20, 2019 5:06 pm
nolesrule wrote:
Wed Feb 20, 2019 12:50 pm
The only way you would get the full match would be to contribute with every paycheck at least 3%, unless they have a true-up provision.
What nolesrule stated earlier. I think that more than likely you have a "true-up provision". Which means if you max out the Pre-tax contribution in August and stay the entire year with the present employer, they more than likely will deposit the remainder of the 3% matching into the 401(k) at the last pay period. But as the others have stated, why rush to deposit the monies when you can evenly spread out the payments throughout the year.

Also, ask your employer if they allow after-tax payments once the Pre-tax has been exhausted (if you are interested in this...). That way you get the matching 3% put into your account per pay period, and you get to add additional money growing tax-free. (Although, with the after-tax payments you will have less take-home pay during those periods).
You also need to.check that they do indeed match the after tax contributions. Many plans do not.

Carl53
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Re: 401(k) Matching Formula Question

Post by Carl53 » Wed Feb 20, 2019 5:24 pm

Years ago, I made some after tax contributions at the end of the year to get a modest amount of match after I maxed out the then pretax contribution limit. Just created a nightmare. Unless your plan allows immediate conversion to a Roth I would not do after tax contributions again. Just get as close as you can to the $19k without going over.

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Earl Lemongrab
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Re: 401(k) Matching Formula Question

Post by Earl Lemongrab » Wed Feb 20, 2019 6:56 pm

Aak732 wrote:
Wed Feb 20, 2019 5:06 pm
What nolesrule stated earlier. I think that more than likely you have a "true-up provision".
Based on the wording, I think it is more than likely that there is NOT true-up. MegaCorp worked that way, but as they matched after-tax and automatically switched to it when the deferral limit was reached, it wasn't a big deal.

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Earl Lemongrab
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Re: 401(k) Matching Formula Question

Post by Earl Lemongrab » Wed Feb 20, 2019 6:58 pm

Carl53 wrote:
Wed Feb 20, 2019 5:24 pm
Years ago, I made some after tax contributions at the end of the year to get a modest amount of match after I maxed out the then pretax contribution limit. Just created a nightmare. Unless your plan allows immediate conversion to a Roth I would not do after tax contributions again. Just get as close as you can to the $19k without going over.
Why would it be a nightmare? If the plan doesn't allow in-service rollovers or in-plan conversion, then it might not be the optimum tax strategy, but not a big deal otherwise. They'd just be there in the plan. I had old AT amounts in my plan at MegaCorp because I didn't know about Mega Backdoor at the time.

Carl53
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Re: 401(k) Matching Formula Question

Post by Carl53 » Wed Feb 20, 2019 8:30 pm

Earl Lemongrab wrote:
Wed Feb 20, 2019 6:58 pm
Carl53 wrote:
Wed Feb 20, 2019 5:24 pm
Years ago, I made some after tax contributions at the end of the year to get a modest amount of match after I maxed out the then pretax contribution limit. Just created a nightmare. Unless your plan allows immediate conversion to a Roth I would not do after tax contributions again. Just get as close as you can to the $19k without going over.
Why would it be a nightmare? If the plan doesn't allow in-service rollovers or in-plan conversion, then it might not be the optimum tax strategy, but not a big deal otherwise. They'd just be there in the plan. I had old AT amounts in my plan at MegaCorp because I didn't know about Mega Backdoor at the time.
Back in the 90s I was concerned that I ultimately would be creating a savings plan situation that I would end up having a prorated basis to manage for a minimal amount of $. I withdrew the after tax contributions and the account also distributed the earnings which I expected to pay tax on. Don’t recall if I was using turbo tax or tax act at the time but I had two years where I had to go through a lot of machinations to fool the tax software into not taxing me twice on the distributed earnings.

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whodidntante
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Re: 401(k) Matching Formula Question

Post by whodidntante » Wed Feb 20, 2019 8:42 pm

People usually feel compelled to provide an answer when asked a question, so you need to be careful who you ask. Specifically, don't ask HR. There is zero chance they will know if there is a true up provision, or even what that means, at least at my company. The worst case is that you get an answer from them anyway and you believe it.

This is a question you can answer yourself. Get your grubby hands on the plan document. Not the summary plan description, the plan document. It's described there. It's also a good document to have in the event that you can't sleep one night.

You can also look to see if you got an extra contribution from the company in prior years.

ccieemeritus
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Re: 401(k) Matching Formula Question

Post by ccieemeritus » Wed Feb 20, 2019 10:07 pm

I used to max out my 401k early. My matching was per pay period and I missed out on some money late each year.

I got smarter (partly by reading Bogleheads). I adjusted my percentage to max out during the last period.

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Earl Lemongrab
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Re: 401(k) Matching Formula Question

Post by Earl Lemongrab » Thu Feb 21, 2019 12:29 am

Carl53 wrote:
Wed Feb 20, 2019 8:30 pm
Back in the 90s I was concerned that I ultimately would be creating a savings plan situation that I would end up having a prorated basis to manage for a minimal amount of $. I withdrew the after tax contributions and the account also distributed the earnings which I expected to pay tax on. Don’t recall if I was using turbo tax or tax act at the time but I had two years where I had to go through a lot of machinations to fool the tax software into not taxing me twice on the distributed earnings.
The law requires the earnings distribution. You did owe tax on them, as they were pretax. The contributions were not taxable. I rolled it all to a TIRA then rolled the earnings back into the 401(k), then converted the after-tax to Roth.

MathIsMyWayr
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Re: 401(k) Matching Formula Question

Post by MathIsMyWayr » Thu Feb 21, 2019 12:52 am

CaptainMarvel wrote:
Wed Feb 20, 2019 12:40 pm
My employer matches our 401(k) plan contributions. The formula is described as: "The company matches 100% of the first 3% of eligible pay an employee contributes per pay period."
OP should check the plan document for the definitive answer. My company match has a similar wording, "per pay period," but true-up is specified somewhere else in the document. In my case, they go by the contribution percentage I choose at the plan custodian, Fidelity. Apparently the payroll software refers to this number for calculating the match amount - easy to program. I was advised not to lower it even after hitting an annual contribution limit.

Carl53
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Re: 401(k) Matching Formula Question

Post by Carl53 » Thu Feb 21, 2019 5:06 am

Earl Lemongrab wrote:
Thu Feb 21, 2019 12:29 am
Carl53 wrote:
Wed Feb 20, 2019 8:30 pm
Back in the 90s I was concerned that I ultimately would be creating a savings plan situation that I would end up having a prorated basis to manage for a minimal amount of $. I withdrew the after tax contributions and the account also distributed the earnings which I expected to pay tax on. Don’t recall if I was using turbo tax or tax act at the time but I had two years where I had to go through a lot of machinations to fool the tax software into not taxing me twice on the distributed earnings.
The law requires the earnings distribution. You did owe tax on them, as they were pretax. The contributions were not taxable. I rolled it all to a TIRA then rolled the earnings back into the 401(k), then converted the after-tax to Roth.
Back then my 401k was not flexible enough to allow TIRA rollovers. Oh I had no problem paying taxes on the earnings, which I did. The software was not up to the task at the time, maybe it was the coding of the 1099, but the software effectively wanted to count the earnings distribution twice. Likely it was user error, but a real pain at the time for a few hundred of earnings.

JustinR
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Re: 401(k) Matching Formula Question

Post by JustinR » Thu Feb 21, 2019 5:24 am

You need to spread out your contributions to every pay period.

This is extremely common.

international001
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Re: 401(k) Matching Formula Question

Post by international001 » Thu Feb 21, 2019 5:57 am

There is an advantage in front loading (early investment).
I try to frontload as much as I can, but also spread out the rest till the last paycheck. Objective is not hit true-up and make sure After-tax 401k does not eat pre-tax/roth 401k space

Need a spreadsheet to do it right.

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