Variable Compensation and 401k Match

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ny_knicks
Posts: 57
Joined: Wed Jan 04, 2017 11:20 pm

Variable Compensation and 401k Match

Post by ny_knicks » Fri May 19, 2017 10:39 am

How do you approach maxing 401k contributions/matching when a large percentage of your total compensation is in the form of a yearly bonus. I did some calculations and there is the potential to miss out on the match if you max out your 401k too early in the year.

Do you start the year making the minimum contribution necessary to meet the match, then once the bonus is announced change your contribution to make the largest possible percentage contribution while still leaving enough room to make minimum contributions throughout the remainder of the year to meet the match requirement?

trees
Posts: 60
Joined: Tue Feb 15, 2011 2:20 pm

Re: Variable Compensation and 401k Match

Post by trees » Fri May 19, 2017 11:00 am

This really depends on how your match is structured. Mine is not capped per pay period and is a strict 50% match, so I front load my 401k in January with my bonus.

If it is capped, then I would suggest dividing it evenly per pay period to the max that will get your full match.

lakpr
Posts: 206
Joined: Fri Mar 18, 2011 9:59 am

Re: Variable Compensation and 401k Match

Post by lakpr » Fri May 19, 2017 7:56 pm

My company allows us to contribute specific $ amount per paycheck. So we subtract the yearly amount needed to get max match assuming no bonus from $18K and adjust the amount prior to and after the bonus check pay period.

MikeG62
Posts: 452
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Location: New Jersey

Re: Variable Compensation and 401k Match

Post by MikeG62 » Sat May 20, 2017 8:38 am

ny_knicks wrote:How do you approach maxing 401k contributions/matching when a large percentage of your total compensation is in the form of a yearly bonus. I did some calculations and there is the potential to miss out on the match if you max out your 401k too early in the year.


Are you sure you will miss out on some of the match if you max out early? My former employer had a true-up mechanism (done early in the following year) to ensure those who maxed their EE contributions early were kept whole.

livesoft
Posts: 56365
Joined: Thu Mar 01, 2007 8:00 pm

Re: Variable Compensation and 401k Match

Post by livesoft » Sat May 20, 2017 8:54 am

My spouse is in this situation because the bonus is paid twice between the two December paychecks and is not guaranteed. In the 3 years working under this arrangement, she missed out on the mostest company match twice. Here is how it can work for someone who can contribute $24,000 a year:

First, there is no so-called "true-up", so unless one contributes at least 3% of gross of every possible paycheck and bonus check, then one will not get the company match.

Second, to reach $24,000 a year, one needs to contribute a lot more than 3% of each paycheck.

If one says contribute $1,000 per paycheck, then the bonus check counts and one doesn't get the match on the last paycheck.

If one says contribute 3% per paycheck, then that is much less than $24,000 annually.

If one contributes $800 per paycheck with the intention of filling up with the last paycheck, then the last paycheck may not have enough money in it to get to $24,000. That is, even contributing 100% of the last paycheck won't hit the $24,000 contribution limit.

If one contributes $900 per check, in a couple instances, one of the bonus checks was under $900, so the entire check (less FICA/medicare taxes) gets contributed, but by that time in December it is too late to change contribution amounts because the 401(k) requires a week to get things accomplished.

So the way that worked was to contribute about $900 per paycheck through November which is about $20,000 and then start talking to Payroll about bonus amounts. Then set the contribution to be 3% for the first December paycheck and the bonus checks, then set the contribution amount to be 100% (or highest limit) for the final paycheck. The chances that 3% of the first 3 checks in December exceeding $4,000 (remember $20K + $4K = $24K) are slim to none, but one still wants to have at least 3% of the final paycheck get contributed to hit $24K on the last day of the year.

But there is another caveat: If there are no bonus checks, then 3% of the first December paycheck PLUS all of the last December paycheck have to hit $24,000. One should know the size of the last December paycheck when making contribution level changes after Thanksgiving.

And one more detail: My spouse's company has 26 regular paychecks a year and not 24, so I simplified above. Sometimes there are 3 paychecks in December plus the two bonus checks. Each year can be different.

Now that I re-read the above, it's rather complicated, isn't it? It took 3 years to figure this out. I actually believe that my spouse is probably the only one at her company of over 300 people who did both (a) made max 401(k) contribution and (b) got the highest possible complete company match.
Last edited by livesoft on Sat May 20, 2017 9:00 am, edited 1 time in total.
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runner540
Posts: 344
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Re: Variable Compensation and 401k Match

Post by runner540 » Sat May 20, 2017 8:58 am

This will be governed by your company's plan documents. Ask for a copy, read them, then call HR and the administrator (Fidelity, Vanguard, etc.) to discuss. One company I worked for allowed us to change 401k contributions specifically for the bonus pay period. Another matched once a year, at the end of the year, so timing didn't matter at all.

If you're concerned about it, I would stop contributions ahead of the bonus pay period, then restart so your contributions are relatively smooth throughout the year.

livesoft
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Re: Variable Compensation and 401k Match

Post by livesoft » Sat May 20, 2017 9:01 am

runner540 wrote:... I would stop contributions ahead of the bonus pay period, ...

My spouse would lose 3% of the bonus as an extra company match if she did that because of the way their matching works per check.
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JGoneRiding
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Joined: Tue Jul 15, 2014 3:26 pm

Re: Variable Compensation and 401k Match

Post by JGoneRiding » Sun May 21, 2017 4:27 pm

I have simply divided the amount that is allowed to be contributed by 12 and set it to do that every month (rather than %) Is that not an option? If your pay roll says no try checking directly with your 401k provider.

In my case its actually a simple IRA but once I wanted to max it was no problem to just set it to a dollar amount rather than try to adjust the % to come out exact. I understand the issue as I also have variable pay and bonus.

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