1 yr ban of 401K contribution?

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Phinance
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1 yr ban of 401K contribution?

Post by Phinance » Thu Jan 09, 2020 12:33 pm

Scenario: I’m currently in a job where my total yearly (employee/employer) 401K contribution is 57K (4750/mo). Considering taking a job in another city this summer for family reasons. However this job restricts their 401K contribution to 1 yr after hire (I would be eligible to contribute July 2021). Is this devastating financially? Any ways of Lessing this financial hit? (Opening an individual 401K? Catch up contributions?)

Best & Thank you.
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Brianmcg321
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Re: 1 yr ban of 401K contribution?

Post by Brianmcg321 » Thu Jan 09, 2020 12:39 pm

It's certainly not devastating. If you save that much a year, you'll be fine. Just put as much in IRAs as you can and the rest in a taxable account. Or just buy yourself one of those new corvettes. Red.
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KyleAAA
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Re: 1 yr ban of 401K contribution?

Post by KyleAAA » Thu Jan 09, 2020 12:40 pm

It's not devastating. You'll pay a few thousand more in taxes next year as a result and you'll end up with more in taxable. That's a really odd limitation. I can see suspending the match for a year, but this seems pointless.

Momus
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Re: 1 yr ban of 401K contribution?

Post by Momus » Thu Jan 09, 2020 12:41 pm

Front load your 401k before you quit, you can put as much as 80% of your gross paycheck.

Depends on how much you make, If you are making like 200k, in just 2 paycheck you can max it out. Then, quit.

Or, just put as much as you can, and rely on your emergency savings (hope you have at least 6-8 months).
Last edited by Momus on Thu Jan 09, 2020 12:42 pm, edited 2 times in total.

FoolMeOnce
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Re: 1 yr ban of 401K contribution?

Post by FoolMeOnce » Thu Jan 09, 2020 12:42 pm

Can you max 2020 contributions before you leave your current employer? And then with proper saving and planning, you can max your 2021 contributions starting next July. You won't miss out on anything.

Even if you miss half of the max in one year and just save in taxable instead, this is hardly devastating and just a very minor point on the ledger in your decision of whether to take the job. Or really not a consideration at all.

azanon
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Re: 1 yr ban of 401K contribution?

Post by azanon » Thu Jan 09, 2020 12:42 pm

You're typically saving almost as much as the median U.S. household income (assuming you don't have any other savings). I think you'll be just fine missing a year :beer .

amindu
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Re: 1 yr ban of 401K contribution?

Post by amindu » Thu Jan 09, 2020 12:43 pm

Phinance wrote:
Thu Jan 09, 2020 12:33 pm
Scenario: I’m currently in a job where my total yearly (employee/employer) 401K contribution is 57K (4750/mo). Considering taking a job in another city this summer for family reasons. However this job restricts their 401K contribution to 1 yr after hire (I would be eligible to contribute July 2021). Is this devastating financially? Any ways of Lessing this financial hit? (Opening an individual 401K? Catch up contributions?)

Best & Thank you.
Can you front load the 2020 contributions in the 6 or so months you have before you make the move and then do the same the 2nd half of next year once you are eligible?

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Phinance
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Re: 1 yr ban of 401K contribution?

Post by Phinance » Thu Jan 09, 2020 12:44 pm

Interesting idea, I can ask..
"Our life is frittered away by detail. Simplify, simplify." -Thoreau

milo minderbinder
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Re: 1 yr ban of 401K contribution?

Post by milo minderbinder » Thu Jan 09, 2020 12:47 pm

I agree that this should not be the deciding factor in determining whether to the the job.

However, from an employer plan design perspective I find this inexplicable. I would understand having a vesting schedule for the employer match but what is gained from preventing new employees from contributing their own money? Any incremental per employee cost for administration is vastly outweighed by the disincentive to accept employment.

drg02b
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Re: 1 yr ban of 401K contribution?

Post by drg02b » Thu Jan 09, 2020 12:54 pm

Phinance wrote:
Thu Jan 09, 2020 12:33 pm
Scenario: I’m currently in a job where my total yearly (employee/employer) 401K contribution is 57K (4750/mo). Considering taking a job in another city this summer for family reasons. However this job restricts their 401K contribution to 1 yr after hire (I would be eligible to contribute July 2021). Is this devastating financially? Any ways of Lessing this financial hit? (Opening an individual 401K? Catch up contributions?)

Best & Thank you.
Yeah, I can change my contributions in any month before the payroll deadline at my job. If they'll let you, max out your contribution on next available paycheck (or calculate what % you'll need to hit 2020 max by your last paycheck at current company). Then do the same when you're eligible to contribute in 2021.

I do this at my current job to front-load, while still contributing enough to get the match for the remainder of the year, but it's an automated system -- don't even have to talk to anyone. Though surprised some employers won't let you contribute your own money on first payroll (even my last small co. job allowed that)...

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Re: 1 yr ban of 401K contribution?

Post by Spirit Rider » Thu Jan 09, 2020 1:04 pm

You can only adopt and contribute to a one-participant 401k to the extent you have self-employed earned income. You can not use your W-2 income as the basis for making one-participant 401k contributions.

The OP may not be able to front load their contributions to max out the $57K:
  • Under the tax code and IRS rules and regulations, an employee can make employee deferrals up to 100% of compensation less mandatory contributions (FICA, income tax withholding, employee share of Section 125 benefits, HSA contributions, etc..). The 80% limit mentioned is not an IRS limit, but rather an arbitrary plan limit. A plan limit can be any percentage. Some plans have limits as low as 25% or even lower.
  • If the OP reaches the employee deferral limit (2020 - $19.5K) early in the year, they may or may not be able to maximize the employer contributions. Even if the plan does a true up on employer matches. They may have a last day requirement for the true up.
Last edited by Spirit Rider on Thu Jan 09, 2020 1:17 pm, edited 1 time in total.

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Watty
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Re: 1 yr ban of 401K contribution?

Post by Watty » Thu Jan 09, 2020 1:05 pm

milo minderbinder wrote:
Thu Jan 09, 2020 12:47 pm
However, from an employer plan design perspective I find this inexplicable. I would understand having a vesting schedule for the employer match but what is gained from preventing new employees from contributing their own money? Any incremental per employee cost for administration is vastly outweighed by the disincentive to accept employment.
I have seen companies where 90%+(?) of the employees were relatively low paid hourly employees that didn't work under the greatest conditions because of the nature of the job, and it also required staffing 24 hours a day so a lot of people had to work the night shifts. There was a very high turnover rate and a high percentage of them did not even last a year. Most of them would not have contributed to a 401k even if they were eligible.

This is just speculation that I did not look into but I would suspect that some of the 401k safe harbor and HCE rules look at the participation rate of eligible employees so but not making people eligible until they had worked there a year they could qualify for those rules.

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Re: 1 yr ban of 401K contribution?

Post by abuss368 » Thu Jan 09, 2020 1:17 pm

I have heard of this although I suspect it is becoming rare in today's competitive job market. I would simply increase cash, invest in a taxable account, fund IRAs, and pay down debt. In one year you will be happy you did.
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Re: 1 yr ban of 401K contribution?

Post by Spirit Rider » Thu Jan 09, 2020 1:25 pm

milo minderbinder wrote:
Thu Jan 09, 2020 12:47 pm
However, from an employer plan design perspective I find this inexplicable. I would understand having a vesting schedule for the employer match but what is gained from preventing new employees from contributing their own money? Any incremental per employee cost for administration is vastly outweighed by the disincentive to accept employment.
It may be inexplicable to you, but many companies view it as a retention tool and to minimize employer contributions for short duration employees. Not to mention, in order to exclude part-time employees < 1,000* hours/year, an employer must have a time of service requirement (usually one (1) year).

*The recent enactment of the SECRURE Act reduces this to 500 hours/year for employees with 3+ years of service.

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Re: 1 yr ban of 401K contribution?

Post by Spirit Rider » Thu Jan 09, 2020 1:25 pm

milo minderbinder wrote:
Thu Jan 09, 2020 12:47 pm
However, from an employer plan design perspective I find this inexplicable. I would understand having a vesting schedule for the employer match but what is gained from preventing new employees from contributing their own money? Any incremental per employee cost for administration is vastly outweighed by the disincentive to accept employment.
It may be inexplicable to you, but many companies view it as a retention tool and to minimize employer contributions for short duration employees. Not to mention, in order to exclude part-time employees < 1,000* hours/year, an employer must have a time of service requirement (usually one (1) year).

*The recent enactment of the SECRURE Act reduces this to 500 hours/year for employees with 3+ years of service.

milo minderbinder
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Re: 1 yr ban of 401K contribution?

Post by milo minderbinder » Thu Jan 09, 2020 3:41 pm

Spirit Rider wrote:
Thu Jan 09, 2020 1:25 pm
milo minderbinder wrote:
Thu Jan 09, 2020 12:47 pm
However, from an employer plan design perspective I find this inexplicable. I would understand having a vesting schedule for the employer match but what is gained from preventing new employees from contributing their own money? Any incremental per employee cost for administration is vastly outweighed by the disincentive to accept employment.
It may be inexplicable to you, but many companies view it as a retention tool and to minimize employer contributions for short duration employees. Not to mention, in order to exclude part-time employees < 1,000* hours/year, an employer must have a time of service requirement (usually one (1) year).

*The recent enactment of the SECRURE Act reduces this to 500 hours/year for employees with 3+ years of service.
Its not a very good retention tool if one can contribute immediately with a different employer. Better practice is to maximize retention by time vesting the employer match.

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Re: 1 yr ban of 401K contribution?

Post by JBTX » Thu Jan 09, 2020 3:44 pm

KyleAAA wrote:
Thu Jan 09, 2020 12:40 pm
It's not devastating. You'll pay a few thousand more in taxes next year as a result and you'll end up with more in taxable. That's a really odd limitation. I can see suspending the match for a year, but this seems pointless.
Some employers tend to have a lot of churn with new employees, and want to save the match for long term employees. Also reduces administrative work related to churned employees.

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Re: 1 yr ban of 401K contribution?

Post by JBTX » Thu Jan 09, 2020 3:46 pm

milo minderbinder wrote:
Thu Jan 09, 2020 3:41 pm
Spirit Rider wrote:
Thu Jan 09, 2020 1:25 pm
milo minderbinder wrote:
Thu Jan 09, 2020 12:47 pm
However, from an employer plan design perspective I find this inexplicable. I would understand having a vesting schedule for the employer match but what is gained from preventing new employees from contributing their own money? Any incremental per employee cost for administration is vastly outweighed by the disincentive to accept employment.
It may be inexplicable to you, but many companies view it as a retention tool and to minimize employer contributions for short duration employees. Not to mention, in order to exclude part-time employees < 1,000* hours/year, an employer must have a time of service requirement (usually one (1) year).

*The recent enactment of the SECRURE Act reduces this to 500 hours/year for employees with 3+ years of service.
Its not a very good retention tool if one can contribute immediately with a different employer. Better practice is to maximize retention by time vesting the employer match.
In some cases 401k participation is low anyway.

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Re: 1 yr ban of 401K contribution?

Post by TheDDC » Thu Jan 09, 2020 3:51 pm

milo minderbinder wrote:
Thu Jan 09, 2020 12:47 pm
I agree that this should not be the deciding factor in determining whether to the the job.

However, from an employer plan design perspective I find this inexplicable. I would understand having a vesting schedule for the employer match but what is gained from preventing new employees from contributing their own money? Any incremental per employee cost for administration is vastly outweighed by the disincentive to accept employment.
I disagree. I think this would be a factor (though maybe not a *deciding* one). There may be other stupid decisions up their sleeves as well. This could be a preview. On the other hand it could be a great job. I would ask for an exception to be made and let them know how much you value saving - saving money for yourself AND saving money for the company. Same stupid policy as 90 days for health care. Okay I'll make sure I (or anyone in my household) doesn't get sick for 90 days. WTF. I was able to negotiate that down to 0 days the one time an employer tried to pull that (then didn't take the job).

I'm sure you could negotiate an arrangement on 401(k) contributions.

Go GIT 'em.

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Re: 1 yr ban of 401K contribution?

Post by KyleAAA » Thu Jan 09, 2020 4:27 pm

JBTX wrote:
Thu Jan 09, 2020 3:44 pm
KyleAAA wrote:
Thu Jan 09, 2020 12:40 pm
It's not devastating. You'll pay a few thousand more in taxes next year as a result and you'll end up with more in taxable. That's a really odd limitation. I can see suspending the match for a year, but this seems pointless.
Some employers tend to have a lot of churn with new employees, and want to save the match for long term employees. Also reduces administrative work related to churned employees.
You can have match vesting be separate from 401k eligibility. The administrative work is easy to automate. There's no good reason to do this other than laziness. Cheapness isn't even an excuse because automation would reduce costs.

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Re: 1 yr ban of 401K contribution?

Post by afan » Thu Jan 09, 2020 4:55 pm

It would save money if the company puts any funds into the 401. But excluding employees for the first year the company avoids paying a match.

By the same token, the OP would miss out on a year of employer contribution to the retirement plan. Unless they gross up your pay with a signing bonus to compensate, you will lose this money.
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JBTX
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Re: 1 yr ban of 401K contribution?

Post by JBTX » Thu Jan 09, 2020 4:57 pm

KyleAAA wrote:
Thu Jan 09, 2020 4:27 pm
JBTX wrote:
Thu Jan 09, 2020 3:44 pm
KyleAAA wrote:
Thu Jan 09, 2020 12:40 pm
It's not devastating. You'll pay a few thousand more in taxes next year as a result and you'll end up with more in taxable. That's a really odd limitation. I can see suspending the match for a year, but this seems pointless.
Some employers tend to have a lot of churn with new employees, and want to save the match for long term employees. Also reduces administrative work related to churned employees.
You can have match vesting be separate from 401k eligibility. The administrative work is easy to automate. There's no good reason to do this other than laziness. Cheapness isn't even an excuse because automation would reduce costs.
You can call my DW a lot of things but definitely not lazy, nor really cheap.

When their small company switched a high fee plan with a poor match to a safe harbor plan with better match, they decided to delay eligibility to one year. As I said, there is a fair amount of initial churn of employees. Most of the employees are "blue collar" and paid fairly well. Their benefit package is reasonably generous compared with competitors. Having a health plan that has low or no employee contribution moves the needle. The specifics of a 401k plan doesn't. Most don't participate in spite of a free match.

If we were talking about administrative salaried positions, I would agree a one year delay would be a competitive detriment.

123
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Re: 1 yr ban of 401K contribution?

Post by 123 » Thu Jan 09, 2020 5:03 pm

KyleAAA wrote:
Thu Jan 09, 2020 12:40 pm
...That's a really odd limitation...
It used to be much more common to limit 401k participation to employees who had served at least a year. It was done to reduce costs to an employer so they didn't have to pay the costs of account maintenance, or fund matching contributions, for employees who didn't sit around. With the acknowledgement that virtually no one is an employee at the same employer for life these limitations are falling by the wayside, at least for many employers. If an employer still has such a limitation it's a sign that they're of the old "You have to pay your dues" mentality. It could be a clue that other parts of their HR policies are archaic as well.
TheDDC wrote:
Thu Jan 09, 2020 3:51 pm
...I'm sure you could negotiate an arrangement on 401(k) contributions...
I don't think so. The provisions of the written plan have to be complied with to maintain IRS approval of the plan.
The closest helping hand is at the end of your own arm.

nolesrule
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Re: 1 yr ban of 401K contribution?

Post by nolesrule » Thu Jan 09, 2020 5:13 pm

For companies with high turnover of non-HCEs who aren't likely to contribute anyway the eligibility criteria will help mitigate testing failures.

chessknt
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Re: 1 yr ban of 401K contribution?

Post by chessknt » Thu Jan 09, 2020 5:16 pm

You realize some people have no access to 401k at all and manage to retire right? It won't be as efficient due to taxes but you can still save in a taxable account...

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Re: 1 yr ban of 401K contribution?

Post by Katietsu » Thu Jan 09, 2020 5:27 pm

chessknt wrote:
Thu Jan 09, 2020 5:16 pm
You realize some people have no access to 401k at all and manage to retire right? It won't be as efficient due to taxes but you can still save in a taxable account...
Agreed. I was thinking that a lot of people here have good benefits based on the responses.

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celia
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Re: 1 yr ban of 401K contribution?

Post by celia » Thu Jan 09, 2020 5:36 pm

I don't see anything devastating at all. You are considering funding a 401K for half of 2020 and for half of 2021. With your contributions cut in half, you likely will still be among the top contributors at both companies!
.
P.S. After you leave the current company, you might want to consider converting part of your 401K before rolling the rest into the new 401K.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: 1 yr ban of 401K contribution?

Post by Trader Joe » Thu Jan 09, 2020 5:48 pm

Phinance wrote:
Thu Jan 09, 2020 12:33 pm
Scenario: I’m currently in a job where my total yearly (employee/employer) 401K contribution is 57K (4750/mo). Considering taking a job in another city this summer for family reasons. However this job restricts their 401K contribution to 1 yr after hire (I would be eligible to contribute July 2021). Is this devastating financially? Any ways of Lessing this financial hit? (Opening an individual 401K? Catch up contributions?)

Best & Thank you.
Given the information that you provided I am not sure if this would be devastating to your situation.

I can say that I would never, ever accept any job with the 401(k) constraints that you mention.

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Re: 1 yr ban of 401K contribution?

Post by an_asker » Thu Jan 09, 2020 5:54 pm

Trader Joe wrote:
Thu Jan 09, 2020 5:48 pm
Phinance wrote:
Thu Jan 09, 2020 12:33 pm
Scenario: I’m currently in a job where my total yearly (employee/employer) 401K contribution is 57K (4750/mo). Considering taking a job in another city this summer for family reasons. However this job restricts their 401K contribution to 1 yr after hire (I would be eligible to contribute July 2021). Is this devastating financially? Any ways of Lessing this financial hit? (Opening an individual 401K? Catch up contributions?)

Best & Thank you.
Given the information that you provided I am not sure if this would be devastating to your situation.

I can say that I would never, ever accept any job with the 401(k) constraints that you mention.
Not even if the job puts $50k into your 401(k) if you put $7k in?

#justsaying

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Re: 1 yr ban of 401K contribution?

Post by KyleAAA » Thu Jan 09, 2020 6:00 pm

JBTX wrote:
Thu Jan 09, 2020 4:57 pm
KyleAAA wrote:
Thu Jan 09, 2020 4:27 pm
JBTX wrote:
Thu Jan 09, 2020 3:44 pm
KyleAAA wrote:
Thu Jan 09, 2020 12:40 pm
It's not devastating. You'll pay a few thousand more in taxes next year as a result and you'll end up with more in taxable. That's a really odd limitation. I can see suspending the match for a year, but this seems pointless.
Some employers tend to have a lot of churn with new employees, and want to save the match for long term employees. Also reduces administrative work related to churned employees.
You can have match vesting be separate from 401k eligibility. The administrative work is easy to automate. There's no good reason to do this other than laziness. Cheapness isn't even an excuse because automation would reduce costs.
You can call my DW a lot of things but definitely not lazy, nor really cheap.

When their small company switched a high fee plan with a poor match to a safe harbor plan with better match, they decided to delay eligibility to one year. As I said, there is a fair amount of initial churn of employees. Most of the employees are "blue collar" and paid fairly well. Their benefit package is reasonably generous compared with competitors. Having a health plan that has low or no employee contribution moves the needle. The specifics of a 401k plan doesn't. Most don't participate in spite of a free match.

If we were talking about administrative salaried positions, I would agree a one year delay would be a competitive detriment.
I didn't say it was a competitive detriment. I said there was no compelling reason to delay eligibility other than laziness. There's no administrative burden or cost disadvantage to speak of.

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Re: 1 yr ban of 401K contribution?

Post by JamesSFO » Thu Jan 09, 2020 6:33 pm

KyleAAA wrote:
Thu Jan 09, 2020 6:00 pm
JBTX wrote:
Thu Jan 09, 2020 4:57 pm
...If we were talking about administrative salaried positions, I would agree a one year delay would be a competitive detriment.
I didn't say it was a competitive detriment. I said there was no compelling reason to delay eligibility other than laziness. There's no administrative burden or cost disadvantage to speak of.
I will say our small business has a 1 year waiting period, we also have a 3% contribution to all employees + profit sharing into the 401K. It's a pretty generous plan (also no fees to employees and all admiral shares). For us it was about making sure that the people who got an extra 3+% "bonus" were longer term employees. YMMV.

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Re: 1 yr ban of 401K contribution?

Post by whodidntante » Thu Jan 09, 2020 6:49 pm

Trader Joe wrote:
Thu Jan 09, 2020 5:48 pm
Phinance wrote:
Thu Jan 09, 2020 12:33 pm
Scenario: I’m currently in a job where my total yearly (employee/employer) 401K contribution is 57K (4750/mo). Considering taking a job in another city this summer for family reasons. However this job restricts their 401K contribution to 1 yr after hire (I would be eligible to contribute July 2021). Is this devastating financially? Any ways of Lessing this financial hit? (Opening an individual 401K? Catch up contributions?)

Best & Thank you.
Given the information that you provided I am not sure if this would be devastating to your situation.

I can say that I would never, ever accept any job with the 401(k) constraints that you mention.
Really? I would evaluate the whole offer compared to what else might available to me. The 401k plan and its quirks is just one factor. I have also accepted a job with no 401k plan before.

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Re: 1 yr ban of 401K contribution?

Post by JBTX » Thu Jan 09, 2020 7:09 pm

JamesSFO wrote:
Thu Jan 09, 2020 6:33 pm
KyleAAA wrote:
Thu Jan 09, 2020 6:00 pm
JBTX wrote:
Thu Jan 09, 2020 4:57 pm
...If we were talking about administrative salaried positions, I would agree a one year delay would be a competitive detriment.
I didn't say it was a competitive detriment. I said there was no compelling reason to delay eligibility other than laziness. There's no administrative burden or cost disadvantage to speak of.
I will say our small business has a 1 year waiting period, we also have a 3% contribution to all employees + profit sharing into the 401K. It's a pretty generous plan (also no fees to employees and all admiral shares). For us it was about making sure that the people who got an extra 3+% "bonus" were longer term employees. YMMV.
No. You and my DW are lazy. KyleAAA is sure of it. Who are we to argue?

Your explanation is spot on. A small company match comes directly out of owners pocket. Owner only wanted that to go to longer term employees who earn it.

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Re: 1 yr ban of 401K contribution?

Post by JBTX » Thu Jan 09, 2020 7:17 pm

KyleAAA wrote:
Thu Jan 09, 2020 6:00 pm
JBTX wrote:
Thu Jan 09, 2020 4:57 pm
KyleAAA wrote:
Thu Jan 09, 2020 4:27 pm
JBTX wrote:
Thu Jan 09, 2020 3:44 pm
KyleAAA wrote:
Thu Jan 09, 2020 12:40 pm
It's not devastating. You'll pay a few thousand more in taxes next year as a result and you'll end up with more in taxable. That's a really odd limitation. I can see suspending the match for a year, but this seems pointless.
Some employers tend to have a lot of churn with new employees, and want to save the match for long term employees. Also reduces administrative work related to churned employees.
You can have match vesting be separate from 401k eligibility.The administrative work is easy to automate. There's no good reason to do this other than laziness. Cheapness isn't even an excuse because automation would reduce costs.
You can call my DW a lot of things but definitely not lazy, nor really cheap.

When their small company switched a high fee plan with a poor match to a safe harbor plan with better match, they decided to delay eligibility to one year. As I said, there is a fair amount of initial churn of employees. Most of the employees are "blue collar" and paid fairly well. Their benefit package is reasonably generous compared with competitors. Having a health plan that has low or no employee contribution moves the needle. The specifics of a 401k plan doesn't. Most don't participate in spite of a free match.

If we were talking about administrative salaried positions, I would agree a one year delay would be a competitive detriment.
I didn't say it was a competitive detriment. I said there was no compelling reason to delay eligibility other than laziness. There's no administrative burden or cost disadvantage to speak of.

Vesting for a safe harbor plan is immediate.

JBTX
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Re: 1 yr ban of 401K contribution?

Post by JBTX » Thu Jan 09, 2020 7:23 pm

whodidntante wrote:
Thu Jan 09, 2020 6:49 pm
Trader Joe wrote:
Thu Jan 09, 2020 5:48 pm
Phinance wrote:
Thu Jan 09, 2020 12:33 pm
Scenario: I’m currently in a job where my total yearly (employee/employer) 401K contribution is 57K (4750/mo). Considering taking a job in another city this summer for family reasons. However this job restricts their 401K contribution to 1 yr after hire (I would be eligible to contribute July 2021). Is this devastating financially? Any ways of Lessing this financial hit? (Opening an individual 401K? Catch up contributions?)

Best & Thank you.
Given the information that you provided I am not sure if this would be devastating to your situation.

I can say that I would never, ever accept any job with the 401(k) constraints that you mention.
Really? I would evaluate the whole offer compared to what else might available to me. The 401k plan and its quirks is just one factor. I have also accepted a job with no 401k plan before.
The value of a 401k can be fairly easily quantified. Maybe you miss out on $5000 of Immediate tax savings (and ignoring whatever future tax may be) and $5000 of match. That $10000 difference could easily be offset by other salary, bonuses and benefits issues. Making 401k the most important factor of employment is a major case of tail wagging dog.

KyleAAA
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Re: 1 yr ban of 401K contribution?

Post by KyleAAA » Thu Jan 09, 2020 7:42 pm

JBTX wrote:
Thu Jan 09, 2020 7:17 pm
KyleAAA wrote:
Thu Jan 09, 2020 6:00 pm
JBTX wrote:
Thu Jan 09, 2020 4:57 pm
KyleAAA wrote:
Thu Jan 09, 2020 4:27 pm
JBTX wrote:
Thu Jan 09, 2020 3:44 pm


Some employers tend to have a lot of churn with new employees, and want to save the match for long term employees. Also reduces administrative work related to churned employees.
You can have match vesting be separate from 401k eligibility.The administrative work is easy to automate. There's no good reason to do this other than laziness. Cheapness isn't even an excuse because automation would reduce costs.
You can call my DW a lot of things but definitely not lazy, nor really cheap.

When their small company switched a high fee plan with a poor match to a safe harbor plan with better match, they decided to delay eligibility to one year. As I said, there is a fair amount of initial churn of employees. Most of the employees are "blue collar" and paid fairly well. Their benefit package is reasonably generous compared with competitors. Having a health plan that has low or no employee contribution moves the needle. The specifics of a 401k plan doesn't. Most don't participate in spite of a free match.

If we were talking about administrative salaried positions, I would agree a one year delay would be a competitive detriment.
I didn't say it was a competitive detriment. I said there was no compelling reason to delay eligibility other than laziness. There's no administrative burden or cost disadvantage to speak of.

Vesting for a safe harbor plan is immediate.
That would obviously influence the decision of whether or not to go with a safe harbor plan. Still isn't a compelling reason to delay eligibility.

KyleAAA
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Re: 1 yr ban of 401K contribution?

Post by KyleAAA » Thu Jan 09, 2020 7:44 pm

JBTX wrote:
Thu Jan 09, 2020 7:09 pm
JamesSFO wrote:
Thu Jan 09, 2020 6:33 pm
KyleAAA wrote:
Thu Jan 09, 2020 6:00 pm
JBTX wrote:
Thu Jan 09, 2020 4:57 pm
...If we were talking about administrative salaried positions, I would agree a one year delay would be a competitive detriment.
I didn't say it was a competitive detriment. I said there was no compelling reason to delay eligibility other than laziness. There's no administrative burden or cost disadvantage to speak of.
I will say our small business has a 1 year waiting period, we also have a 3% contribution to all employees + profit sharing into the 401K. It's a pretty generous plan (also no fees to employees and all admiral shares). For us it was about making sure that the people who got an extra 3+% "bonus" were longer term employees. YMMV.
No. You and my DW are lazy. KyleAAA is sure of it. Who are we to argue?

Your explanation is spot on. A small company match comes directly out of owners pocket. Owner only wanted that to go to longer term employees who earn it.
I did not say he or your DW were lazy. If you want to reward longer-term employees, there are plenty of other ways to do it. That isn't a compelling reason. There are no objections I've heard so far that couldn't be easily accommodated without the downsides in another way.
Last edited by KyleAAA on Thu Jan 09, 2020 7:46 pm, edited 2 times in total.

UALflyer
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Re: 1 yr ban of 401K contribution?

Post by UALflyer » Thu Jan 09, 2020 7:44 pm

123 wrote:
Thu Jan 09, 2020 5:03 pm
It used to be much more common to limit 401k participation to employees who had served at least a year. It was done to reduce costs to an employer so they didn't have to pay the costs of account maintenance, or fund matching contributions, for employees who didn't sit around. With the acknowledgement that virtually no one is an employee at the same employer for life these limitations are falling by the wayside, at least for many employers. If an employer still has such a limitation it's a sign that they're of the old "You have to pay your dues" mentality. It could be a clue that other parts of their HR policies are archaic as well.
It's actually not archaic at all and continues to be a fairly common feature found in quite a few 401(k)'s. The primary issue here has to do with the HCE discrimination testing.

Statistically, new employee hires have lower 401(k) participation rates, which, for non safe harbor plans, can affect HCE's. If new employees aren't eligible to contribute to a 401(k), they don't get factored into the discrimination testing, which is the reason that it is not uncommon for these types of plans to impose a 1 year waiting period on new hires.

The reason that some non safe harbor plans don't contain this waiting period is simply because of their particular employee mix and the outcome of their specific discrimination testing.
KyleAAA wrote:
Thu Jan 09, 2020 6:00 pm
I said there was no compelling reason to delay eligibility other than laziness. There's no administrative burden or cost disadvantage to speak of.
Please see above. For a non safe harbor plan, the above is a rather compelling reason.

If you have a non safe harbor plan that would fail its discrimination testing without this feature, the employer essentially has two options: 1) increase matching contributions and provide immediate vesting, which, depending on the existing match structure, could cost millions of dollars and, since this would have to vest immediately, prevent the employer from using its 401(k) match to incentivize its employees to remain with the employer longer; or 2) limit 401(k) contributions of the employer's HCE's. If you can avoid either of these options by simply imposing a 1 year waiting period on new hires, it's the lesser of the evils here.
TheDDC wrote:
Thu Jan 09, 2020 3:51 pm
I would ask for an exception to be made and let them know how much you value saving - saving money for yourself AND saving money for the company.
It is not possible for any employer to make a one time exception to something like this, which would require them to amend their plan documents.
Last edited by UALflyer on Thu Jan 09, 2020 8:10 pm, edited 2 times in total.

KyleAAA
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Re: 1 yr ban of 401K contribution?

Post by KyleAAA » Thu Jan 09, 2020 8:06 pm

UALflyer wrote:
Thu Jan 09, 2020 7:44 pm
KyleAAA wrote:
Thu Jan 09, 2020 6:00 pm
I said there was no compelling reason to delay eligibility other than laziness. There's no administrative burden or cost disadvantage to speak of.
Please see above. For a non safe harbor plan, the above is a rather compelling reason.
No it isn't. There are myriad ways to solve the HCE problem.

UALflyer
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Re: 1 yr ban of 401K contribution?

Post by UALflyer » Thu Jan 09, 2020 8:08 pm

KyleAAA wrote:
Thu Jan 09, 2020 8:06 pm
UALflyer wrote:
Thu Jan 09, 2020 7:44 pm
KyleAAA wrote:
Thu Jan 09, 2020 6:00 pm
I said there was no compelling reason to delay eligibility other than laziness. There's no administrative burden or cost disadvantage to speak of.
Please see above. For a non safe harbor plan, the above is a rather compelling reason.
No it isn't. There are myriad ways to solve the HCE problem.
If you have a non safe harbor plan that would fail its discrimination test without this feature, the employer essentially has two options: 1) increase matching contributions and provide immediate vesting, which, depending on the existing match structure, could cost millions of dollars and, since this would have to vest immediately, prevent the employer from using its 401(k) match to incentivize its employees to remain with the employer longer; or 2) limit 401(k) contributions of the employer's HCE's. If you can avoid either of these options by simply imposing a 1 year waiting period on new hires, from a lot of perspectives it's the lesser of the evils here.

If you want to know how common waiting periods are, "more than one-third (41.6 percent) of employers surveyed required workers to wait six months or more before they could participate in the 401k plan. Just over one-quarter (27.2 percent) had a one-year waiting period, the longest permitted by law, according to a study by the Plan Sponsor Council of America (PSCA)." http://www.401khelpcenter.com/401k_educ ... hfQa5CWx9A

I get that you dislike this, which is perfectly understandable, but employers aren't doing this because of laziness.

nolesrule
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Re: 1 yr ban of 401K contribution?

Post by nolesrule » Thu Jan 09, 2020 8:27 pm

I interviewed with a company where a large part of their business is warehousing/packing/shipping for ecommerce retailers. They tend to have a lot of seasonal employees in the fall for the increased demand. They had a waiting period on eligibility, because without it these seasonal employees who are unlikely to participate in the 401k would still count towards compliance testing.

JBTX
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Re: 1 yr ban of 401K contribution?

Post by JBTX » Thu Jan 09, 2020 8:27 pm

KyleAAA wrote:
Thu Jan 09, 2020 7:42 pm
JBTX wrote:
Thu Jan 09, 2020 7:17 pm
KyleAAA wrote:
Thu Jan 09, 2020 6:00 pm
JBTX wrote:
Thu Jan 09, 2020 4:57 pm
KyleAAA wrote:
Thu Jan 09, 2020 4:27 pm


You can have match vesting be separate from 401k eligibility.The administrative work is easy to automate. There's no good reason to do this other than laziness. Cheapness isn't even an excuse because automation would reduce costs.
You can call my DW a lot of things but definitely not lazy, nor really cheap.

When their small company switched a high fee plan with a poor match to a safe harbor plan with better match, they decided to delay eligibility to one year. As I said, there is a fair amount of initial churn of employees. Most of the employees are "blue collar" and paid fairly well. Their benefit package is reasonably generous compared with competitors. Having a health plan that has low or no employee contribution moves the needle. The specifics of a 401k plan doesn't. Most don't participate in spite of a free match.

If we were talking about administrative salaried positions, I would agree a one year delay would be a competitive detriment.
I didn't say it was a competitive detriment. I said there was no compelling reason to delay eligibility other than laziness. There's no administrative burden or cost disadvantage to speak of.

Vesting for a safe harbor plan is immediate.
That would obviously influence the decision of whether or not to go with a safe harbor plan. Still isn't a compelling reason to delay eligibility.
Of course it influences it. It is a major factor.

If you want

- higher income employees, including owners to be able to fully participate
- you don't want to spend additional new match money on new employees with high turnover rate
- you want the match to be reserved for employees who are likely to stay around

And

- you are in a labor market where 401k participation is only a minor or a non factor for new hires

Then deferring eligibility, for as much as a year, could be a logical strategy.

I don't think it would work very well for larger companies or companies with significant professional salaried staff.

KyleAAA
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Re: 1 yr ban of 401K contribution?

Post by KyleAAA » Fri Jan 10, 2020 1:01 am

UALflyer wrote:
Thu Jan 09, 2020 8:08 pm
KyleAAA wrote:
Thu Jan 09, 2020 8:06 pm
UALflyer wrote:
Thu Jan 09, 2020 7:44 pm
KyleAAA wrote:
Thu Jan 09, 2020 6:00 pm
I said there was no compelling reason to delay eligibility other than laziness. There's no administrative burden or cost disadvantage to speak of.
Please see above. For a non safe harbor plan, the above is a rather compelling reason.
No it isn't. There are myriad ways to solve the HCE problem.
If you have a non safe harbor plan that would fail its discrimination test without this feature, the employer essentially has two options: 1) increase matching contributions and provide immediate vesting, which, depending on the existing match structure, could cost millions of dollars and, since this would have to vest immediately, prevent the employer from using its 401(k) match to incentivize its employees to remain with the employer longer; or 2) limit 401(k) contributions of the employer's HCE's. If you can avoid either of these options by simply imposing a 1 year waiting period on new hires, from a lot of perspectives it's the lesser of the evils here.

If you want to know how common waiting periods are, "more than one-third (41.6 percent) of employers surveyed required workers to wait six months or more before they could participate in the 401k plan. Just over one-quarter (27.2 percent) had a one-year waiting period, the longest permitted by law, according to a study by the Plan Sponsor Council of America (PSCA)." http://www.401khelpcenter.com/401k_educ ... hfQa5CWx9A

I get that you dislike this, which is perfectly understandable, but employers aren't doing this because of laziness.
I'm very aware of how common waiting periods are. There's also option 3, which has proven superior in every way: include an auto-enrollment and auto-escalation provision. It has proven to eliminate HCE concerns in the vast majority of cases. Boom. Now you can decouple the HCE test with the desire to incentivize employees to remain with the employer longer. Using a 401k in the way you state is clumsy. Sure, you COULD use it that way, but there are better ways to achieve all those goals. Thus, it's not compelling. It has nothing to do with whether or not I like it, it is objectively inferior. The reason employers opt for the inferior solution is, wait for it, laziness. It certainly doesn't save them money or allow them to better reward loyal highly paid employees. By decoupling the intertwined concerns, you can actually address them effectively.

UALflyer
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Re: 1 yr ban of 401K contribution?

Post by UALflyer » Fri Jan 10, 2020 8:03 am

KyleAAA wrote:
Fri Jan 10, 2020 1:01 am
I'm very aware of how common waiting periods are. There's also option 3, which has proven superior in every way: include an auto-enrollment and auto-escalation provision. It has proven to eliminate HCE concerns in the vast majority of cases. Boom. Now you can decouple the HCE test with the desire to incentivize employees to remain with the employer longer. Using a 401k in the way you state is clumsy. Sure, you COULD use it that way, but there are better ways to achieve all those goals. Thus, it's not compelling. It has nothing to do with whether or not I like it, it is objectively inferior. The reason employers opt for the inferior solution is, wait for it, laziness. It certainly doesn't save them money or allow them to better reward loyal highly paid employees. By decoupling the intertwined concerns, you can actually address them effectively.
Every retirement consultant will tell you that the reason that auto-enrollment is used so infrequently is because it tends to introduce far more problems than it solves. The reason that retirement plan participation rates for new hires tend to be low is because new hires tend to need the money right away and feel that their immediate cash needs trump every other consideration. Auto enrollment then causes them to experience the cash crunch that they were trying to avoid.

You keep approaching this problem from the perspective of a responsible saver who has the means and wants to save towards his retirement. That's great, and this is exactly what this forum is all about. The problem, however, is that for a number of reasons the vast majority of the population is in the exact opposite camp, which is also the reason that the average per capita retirement savings are so low. So, measures like auto-enrollment tend to anger far more new hires than they please, which is the reason that most employers stay away from them.

From an expense standpoint, there's an administrative cost associated with maintaining and managing 401(k)'s. Suddenly increasing the number of 401(k)'s with low balances is expensive for employers, so that is also a consideration for a lot of them.

wolf359
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Re: 1 yr ban of 401K contribution?

Post by wolf359 » Fri Jan 10, 2020 8:58 am

Double your contribution rate (or more) now so that you contribute a year's worth before you leave your current job. You'll get cut off when you hit the 401k max limit, and you'll never exceed the IRS limits.

When you start the new job, save into a taxable account. When you become eligible in mid-year, double your contribution rates there so that you'll hit the 401k max limit prior to the end of the year. Draw from the taxable account for wages, if necessary.

You still won't have employer contributions for a year, but you know that going in.

Contribute to your IRA during the gap year, and roll that money into the new plan (that won't count against your 401k contribution limits.) Since the gap is part of two calendar years, that's about $12,000 that could be contributed during the same timeframe. The point is to keep automated investing going into your asset allocation during the gap year, so you can still participate in market returns (it's not just about the dollar amounts.)

You're also minimizing the impact by starting mid-year. That gives you a chance to make up the contributions during the half years that you're still part of a plan.

sschoe2
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Re: 1 yr ban of 401K contribution?

Post by sschoe2 » Fri Jan 10, 2020 10:13 am

I had that. My company has a 6 month wait before you could join the 401k plan but the only entry dates are 1/1 and 7/1 and I started 7/6 so I had to wait a whole year.

lazydavid
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Re: 1 yr ban of 401K contribution?

Post by lazydavid » Fri Jan 10, 2020 11:58 am

afan wrote:
Thu Jan 09, 2020 4:55 pm
It would save money if the company puts any funds into the 401. But excluding employees for the first year the company avoids paying a match.
Not really. You know how my employer avoids the costs associated with paying a match in the first year? They don't pay a match in the first year. Employees can still contribute, usually by the 2nd check, always by the third--solely dependent on how long it takes to get the account set up, not a fixed delay. But the match doesn't begin until the 27th paycheck.

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Re: 1 yr ban of 401K contribution?

Post by JediMisty » Fri Jan 10, 2020 12:16 pm

lazydavid wrote:
Fri Jan 10, 2020 11:58 am
afan wrote:
Thu Jan 09, 2020 4:55 pm
It would save money if the company puts any funds into the 401. But excluding employees for the first year the company avoids paying a match.
Not really. You know how my employer avoids the costs associated with paying a match in the first year? They don't pay a match in the first year. Employees can still contribute, usually by the 2nd check, always by the third--solely dependent on how long it takes to get the account set up, not a fixed delay. But the match doesn't begin until the 27th paycheck.
I joined a new megacorp in 2016, but was immediately vested in the 401k because they bought the division where I worked for my previous megacorp. So.... I went and checked the policy. We can start the 401k with the first paycheck and matching begins immediately, BUT you must be "vested" for three years to keep the company match. That would be ugly to have it clawed back out of your account in you're laid off. Of course, one is immediately vested in their own contributions. Also, the company match is 5% by paycheck, so you must take care to allow 5% in each check to not leave the match on the table.

KyleAAA
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Re: 1 yr ban of 401K contribution?

Post by KyleAAA » Fri Jan 10, 2020 12:19 pm

UALflyer wrote:
Fri Jan 10, 2020 8:03 am

You keep approaching this problem from the perspective of a responsible saver who has the means and wants to save towards his retirement. That's great, and this is exactly what this forum is all about. The problem, however, is that for a number of reasons the vast majority of the populat
I am not approaching the problem from that perspective. I am approaching the problem from the perspective of the business owner.

wrongfunds
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Re: 1 yr ban of 401K contribution?

Post by wrongfunds » Fri Jan 10, 2020 1:15 pm

That would be ugly to have it clawed back out of your account in you're laid off.
It is done routinely

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