Odd 401K Match

[airahcaz]

Have you ever heard of such a thing? Basically, the match one can receive is capped at 50% of 7% OF THAT PAYCHECK, basically penalizing you if you meet the annual limit too early, thus no incentive to contribute any more than 7 % per pay.

And are these two excerpts the same?

“When you contribute to the 401(k) Plan, the Employer will match 50% of the first 7% of your Annual Compensation that you contribute to the 401(k) Plan in the form of before-tax, Roth 401(k) or after-tax contributions. Matching contributions are made each payroll period.”

“Receive Company matching contributions each pay period if you contribute on a before-tax, Roth, and/or after-tax basis. The Employer will contribute 50 cents for every $1 you contribute up to the first 7% of eligible earnings.”

[sailaway]

Matching per paycheck is common enough that we always warn people about it when they are looking into the mega backdoor roth.

In your case, you could even contribute to the mega backdoor, because they match after tax donations, as well. 3.5% isn't a bad match at all, especially if you earn enough to carry that into after tax contributions.

[Hyperchicken]

penalizing you if you meet the annual limit too early, thus no incentive to contribute any more than 7 % per pay.

If you meet the annual limit too early - yes. You lose your match if you do. Unless there is also true-up match defined by the plan.

No incentive to contribute any more than 7 % per pay - this depends on your annual income. E.g. if you have $100K annual salary, you can contribute 19.5% and capture the full match.

This kind of match is not uncommon. My employer provides similar conditions.

[Kenkat]

You can contribute more than 7% each pay period and still receive the full match for the year; you just have to be sure that any excess contributions don’t result in at least 7% being taken out of each paycheck. In other words, you can’t fully front-load your contributions or else you won’t get the full match available. I don’t think it’s that weird although some plans will do a “true up” at the end of the year to adjust for this.

[Hyperchicken]

3.5% isn't a bad match at all, especially if you earn enough to carry that into after tax contributions.

In my experience, match is always pre-tax, and stops once you hit the $19,500 limit. But other plans may be different.

Agreed, it's a reasonable match. Does not look odd at all. Could be better but OTOH some plans have no match at all.

[walkabout]

I think this is not uncommon. Some companies offer a “true up”. This means that they look at your contributions over the course of the year and, if you didn’t get the full match (annual), maybe because you had “too much” withheld, they deposit the amount you missed out on after the fact. Some companies put the onus on the employee to set their withholding such that they can only receive the max match by making contributions over the course of the entire year.

Also, I don’t think there is “no incentive” to contribute more than 7% of your pay as those contributions are still pre-tax, thus lowering your taxable income.

[Wiggums]

My First plan was only limited by the IRS limit. When we were acquired, the management implemented a similar rule — with a per paycheck cap and match.

[airahcaz]

But why? Why penalize us if we contribute more than 7% and meet the annual limit early vs having to contribute 7 and only 7% per pay?

And what’s the advantage to the company? Delaying match if an employee leaves? Sometimes that is accounted for by delaying match vesting.

[Hyperchicken]

But why? Why penalize us if we contribute more than 7% and meet the annual limit early vs having to contribute 7 and only 7% per pay?

Are you paid more than $278,571 per year?

[lakpr]

But why? Why penalize us if we contribute more than 7% and meet the annual limit early vs having to contribute 7 and only 7% per pay?

And what’s the advantage to the company? Delaying match if an employee leaves? Sometimes that is accounted for by delaying match vesting.

This type of matching is quite the norm. People responding above are being generous when they said this is "somewhat common", it's actually more like 80% of the plans operate similarly. They match on a per paycheck basis.

The advantage to the company is that this forces incentivizes the employees to contribute at least 7% of their annual salary, and in turn, makes it easier for the plan to pass the ADP and ACP testing imposed on the 401k plans. If folks in the cattle class only defer 4% for example, the folks in the first class cannot defer more than 4% of THEIR compensation, to illustrate the incentive.

[Kenkat]

You are NOT penalized for contributing more than 7% of your pay.

You ARE penalized for meeting the annual limit early.

Combining the two statements adds to the confusion in my opinion.

[an_asker]

But why? Why penalize us if we contribute more than 7% and meet the annual limit early vs having to contribute 7 and only 7% per pay?

And what’s the advantage to the company? Delaying match if an employee leaves? Sometimes that is accounted for by delaying match vesting.

What you have is similar to what most plans offer (my last three companies - over most of the last three decades - did the same). The advantage to the company is that you have skin in the game - if they did what you want to do, you could get the 3.5% of your annual salary within the first few months and quit the company leaving them holding the bag.

What your company is doing is making it equitable. As long as your last paycheck of the year has at least 7% of that paycheck going to your 401(k), the company will put 3.5% of that paycheck on your behalf.

You should be thankful that at least your company is not like some others, who use a quarterly match model, i.e., they match once a quarter, at quarter end - if you are still with the company. What that means is that if the employee quits (or laid off) in the middle of the quarter - or late in the quarter - he/she will lose the company match for that entire quarter.

[airahcaz]

But why? Why penalize us if we contribute more than 7% and meet the annual limit early vs having to contribute 7 and only 7% per pay?

And what’s the advantage to the company? Delaying match if an employee leaves? Sometimes that is accounted for by delaying match vesting.

This type of matching is quite the norm. People responding above are being generous when they said this is "somewhat common", it's actually more like 80% of the plans operate similarly. They match on a per paycheck basis.

The advantage to the company is that this forces incentivizes the employees to contribute at least 7% of their annual salary, and in turn, makes it easier for the plan to pass the ADP and ACP testing imposed on the 401k plans. If folks in the cattle class only defer 4% for example, the folks in the first class cannot defer more than 4% of THEIR compensation, to illustrate the incentive.

Ya I was mostly referring to contributing more than 7%, not less, and meeting the annual limit early in the year

[lakpr]

But why? Why penalize us if we contribute more than 7% and meet the annual limit early vs having to contribute 7 and only 7% per pay?

And what’s the advantage to the company? Delaying match if an employee leaves? Sometimes that is accounted for by delaying match vesting.

This type of matching is quite the norm. People responding above are being generous when they said this is "somewhat common", it's actually more like 80% of the plans operate similarly. They match on a per paycheck basis.

The advantage to the company is that this forces incentivizes the employees to contribute at least 7% of their annual salary, and in turn, makes it easier for the plan to pass the ADP and ACP testing imposed on the 401k plans. If folks in the cattle class only defer 4% for example, the folks in the first class cannot defer more than 4% of THEIR compensation, to illustrate the incentive.

Ya I was mostly referring to contributing more than 7%, not less, and meeting the annual limit early in the year

I understand that you feel you will have contributed 7% of your compensation by say mid-July, and thus entitled to the full employer match. However, that's quite not how the plans incentivize employees to even out the contributions throughout the year. There ARE some plans that do true-up (my own plan is one with a true-up), where the employer match is provided NEXT year (in my case January 31st). But there are disadvantages here too. This true-up matching basically means that the employer match amount is NOT in the market for a whole year.

My previous plan worked very much like yours. If you don't contribute at least 6% of your pay, you won't get 4% company match, on a per-paycheck basis. The way to plan for it is to do a bit of high-school algebra. First calculate 7% of your compensation, and subtract that from the annual limit. On a $100k salary, for example, that's $7k. Annual limit = $19.5k. Remainder = $12.5k. You can front-load $12.5k into your plan however early you choose, but simply leave room to contribute $7k until the last paycheck in December.

[johnubc]

Check the documents to see if your company does a True-Up. Many employers do.

[fundseeker]

The federal employees Thrift Savings Plan (TSP) limits the match per pay period, and you do not get any match if you max out before PP 26.

[airahcaz]

Well, I’ve since removed my after-tax contributions so that I could set my pretax to 7%, and since I met pretax limit, that 7% will be deducted after tax and I will receive company match.