401 K match

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Topic Author
palciparum
Posts: 43
Joined: Wed Jun 21, 2017 6:51 pm

401 K match

Post by palciparum » Sat Oct 05, 2019 1:21 pm

The company has 401K plan with match at $0.50 for each $1.00 that employee contributed up to a maximum of 6% of their pre-tax contribution.

The vesting schedule for match is:
Year 1 0%
Year 2 20%
Year 3 40%
Year 4 60%
Year 5 80%
Year 6 100%

Every things is same for all employees except for highly compensated employee, the match comes from Salary Reduction Contribution. 401 K match is compulsory if I choose to contribute to 401K plan and it will come from my salary via salary reduction contribution and it will be vested. So if I leave job say in 2 years, I will lose part of my 401 K match which came from my own salary.

I already have Backdoor Roth IRA.

I hate to lose my own money if I have to change job before the vesting period ends.

Any advice or input?

Thank You

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JamesSFO
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Re: 401 K match

Post by JamesSFO » Sat Oct 05, 2019 1:52 pm

I'm not sure how they can take the match from your salary. Is it possible you've misunderstood the summary plan description?

AFAIK, all 401K matches have to be from the employer (ER) side not the employee (EE) side, but perhaps the HCE aspect is in play?

Are you an HCE and subject to this issue? Maybe what they are doing is trying to avoid having to kick back your contributions at the cost of the (annoying) vesting schedule...

ivk5
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Re: 401 K match

Post by ivk5 » Sat Oct 05, 2019 2:11 pm

You should be immediately vested in contributions that come from your own salary.

retiredjg
Posts: 37804
Joined: Thu Jan 10, 2008 12:56 pm

Re: 401 K match

Post by retiredjg » Sat Oct 05, 2019 2:13 pm

I don't know how what you are saying can be true.

Get some clarification and let us in on how this could be true.

HomeStretch
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Re: 401 K match

Post by HomeStretch » Sat Oct 05, 2019 2:24 pm

I have never heard of a HCE Salary Reduction Contribution.

I have seen companies provide extra match to non-HCE or limit HCE salary deferrals in order to pass plan testing.

If this is true, it seems likely that any match made from your salary would be 100% vested as another poster said.

Is this in writing somewhere?

MathIsMyWayr
Posts: 889
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Location: CA

Re: 401 K match

Post by MathIsMyWayr » Sat Oct 05, 2019 2:30 pm

I have a gut feeling that the company discourages its employees from participating in its 401(k) plan by a compulsory salary reduction to be used as a company match with a long vesting schedule. Why?

Topic Author
palciparum
Posts: 43
Joined: Wed Jun 21, 2017 6:51 pm

Re: 401 K match

Post by palciparum » Sat Oct 05, 2019 3:51 pm

ivk5 wrote:
Sat Oct 05, 2019 2:11 pm
You should be immediately vested in contributions that come from your own salary.

I have been told if my salary is say for example $100,000 and i contributed 19K to 401K. My match per formula would be $3000.00

So they will reduce my gross salary to $97,000 annually and $3000 will go to match.

I guess since my salary is reduced to 97K the 3K match is "no more" from my salary, hence not vested??hedule which come from

I am not sure should I contribute to 401K with this vesting schedule or not? If not, what better option do I have. I already have back door Roth IRA.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: 401 K match

Post by retiredjg » Sat Oct 05, 2019 4:02 pm

Seems like a conundrum to me. Since you are a higher wage earner, you definitely want to use the 401k for tax deferral.

I hope one of our benefits people will explain this.

I wonder if you can skip the match?

HomeStretch
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Joined: Thu Dec 27, 2018 3:06 pm

Re: 401 K match

Post by HomeStretch » Sat Oct 05, 2019 4:13 pm

palciparum wrote:
Sat Oct 05, 2019 3:51 pm
I have been told if my salary is say for example $100,000 and i contributed 19K to 401K. My match per formula would be $3000.00

So they will reduce my gross salary to $97,000 annually and $3000 will go to match.
Is this in writing anywhere?

Is it possible your plan failed the discrimination testing and, as an HCE, you are being told $3,000 of your employee deferral will be returned to you?

Topic Author
palciparum
Posts: 43
Joined: Wed Jun 21, 2017 6:51 pm

Re: 401 K match

Post by palciparum » Sat Oct 05, 2019 4:49 pm

retiredjg wrote:
Sat Oct 05, 2019 4:02 pm
Seems like a conundrum to me. Since you are a higher wage earner, you definitely want to use the 401k for tax deferral.

I hope one of our benefits people will explain this.

I wonder if you can skip the match?
I have been told I can not skip Match if I contribute to 401K.

Topic Author
palciparum
Posts: 43
Joined: Wed Jun 21, 2017 6:51 pm

Re: 401 K match

Post by palciparum » Sat Oct 05, 2019 4:51 pm

HomeStretch wrote:
Sat Oct 05, 2019 4:13 pm
palciparum wrote:
Sat Oct 05, 2019 3:51 pm
I have been told if my salary is say for example $100,000 and i contributed 19K to 401K. My match per formula would be $3000.00

So they will reduce my gross salary to $97,000 annually and $3000 will go to match.
Is this in writing anywhere?

Is it possible your plan failed the discrimination testing and, as an HCE, you are being told $3,000 of your employee deferral will be returned to you?

I am sure it must be in writing some where but I have not seen it. I spoke on the phone.

I was told can not discriminate so everyone has to be vested. However mine will come after reducing my annual salary and making a match from it.

Topic Author
palciparum
Posts: 43
Joined: Wed Jun 21, 2017 6:51 pm

Re: 401 K match

Post by palciparum » Tue Oct 08, 2019 7:17 am

Please do advise, at current scenario, should I contribute to 401K. If not then what else would from advise?

rascott
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Re: 401 K match

Post by rascott » Tue Oct 08, 2019 7:32 am

That's the craziest thing I've ever heard of... and wonder if it's even legal? They aren't really matching anything... and then keeping part of your salary if you leave prior to 6 years?

Independent George
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Re: 401 K match

Post by Independent George » Tue Oct 08, 2019 7:39 am

That doesn't seem right; it's not a match if it's your own salary that's going into the account, and if it's tax deferred, then they are effectively circumventing the 19k limit on deductible contributions. And if you leave, they are withholding a portion of your salary that you've earned. I've never heard of any employer using this policy anywhere.

I would forego the 'match' at the very least, and try to find out more about their policy as it doesn't even sound legal to me.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: 401 K match

Post by retiredjg » Tue Oct 08, 2019 7:43 am

palciparum wrote:
Tue Oct 08, 2019 7:17 am
Please do advise, at current scenario, should I contribute to 401K. If not then what else would from advise?
At your salary level, I think you probably want to contribute the full $19k to the 401k, even if what you think about the match is correct. However, I'm hoping that some people who know a lot about employee benefits will show up and help us all understand your situation. It seems very unusual to me.

dknightd
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Joined: Wed Mar 07, 2018 11:57 am

Re: 401 K match

Post by dknightd » Tue Oct 08, 2019 7:58 am

palciparum wrote:
Sat Oct 05, 2019 3:51 pm
ivk5 wrote:
Sat Oct 05, 2019 2:11 pm
You should be immediately vested in contributions that come from your own salary.

I have been told if my salary is say for example $100,000 and i contributed 19K to 401K. My match per formula would be $3000.00

So they will reduce my gross salary to $97,000 annually and $3000 will go to match.

I guess since my salary is reduced to 97K the 3K match is "no more" from my salary, hence not vested??hedule which come from

I am not sure should I contribute to 401K with this vesting schedule or not? If not, what better option do I have. I already have back door Roth IRA.
I would call them again, to make sure you understood things correctly. More normal they would deduct $19k from your salary (your contribution) and the $3k match would come directly from employer and not effect your salary.
Are you sure they would deduct both the 19k and the 3k from your salary? That does not sound right.

I'd call them again for clarification, ask if there is a written description of the plan.

ERISA Stone
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Re: 401 K match

Post by ERISA Stone » Tue Oct 08, 2019 2:00 pm

If I understand the details correctly, I think I have seen an arrangement on this board before. In that scenario, I believe the match was safe harbor, so at least the employee got 100% of the contribution if he terminated.

My guess is this type of arrangement has never been questioned in courts. Also, I assume this language is in an employment agreement, and not a plan document, correct?

Also, any chance you are a physician?

dknightd
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Joined: Wed Mar 07, 2018 11:57 am

Re: 401 K match

Post by dknightd » Wed Oct 09, 2019 6:51 am

If the plan was as described, I'd ask myself would I take the job if it paid 97k instead of 100k.
Likely the answer would be yes. So I would participate. Knowing that if I worked there 6 years I'd essentially be getting a retroactive pay raise to 100k.

chem6022
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Joined: Sat May 11, 2019 9:19 pm

Re: 401 K match

Post by chem6022 » Wed Oct 09, 2019 8:50 am

I think there is just some confusion here, likely even by the person you were talking to on the phone. "Salary Reduction Contribution" is just another name for "Elective Deferral Contribution". It reduces your salary for tax purposes so it's just the way 401k's work even without a match to defer taxes. But the way to know for sure what you are getting is to actually read the plan document.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: 401 K match

Post by retiredjg » Wed Oct 09, 2019 9:43 am

I too am skeptical. However, I've been wrong enough times about things "we all know for sure" to believe there could be something we don't understand going on here. Sometimes we just don't know what we think we know.

A salary reduction agreement can also be used for a 457 plan. Maybe it is some weird variation of that?

Until someone can explain this, the question still remains about whether to contribute to the 401k. I think it is probably a good idea. There is value in tax-deferral on your $19k. You will also save the taxes on the $3k (or whatever) that will not be included as part of your salary. Yes, it will be disappointing if you don't get all of it back, but there is little to be done about that.

HomeStretch
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Joined: Thu Dec 27, 2018 3:06 pm

Re: 401 K match

Post by HomeStretch » Wed Oct 09, 2019 9:48 am

It’s likely a good idea to contribute. Also it will give you a chance to see what happens to your pay check and accounts to see if this is really a 3% salary reduction and, if so, whether the 3% goes in as a vested employer or subject-to-vesting employer contribution. Please post to let us know what happens.

Topic Author
palciparum
Posts: 43
Joined: Wed Jun 21, 2017 6:51 pm

Re: 401 K match

Post by palciparum » Fri Oct 11, 2019 11:56 am

Thanks for the replies.

May be I didn't use correct terms but 401 K Employer match does come from HCE salary. They reduce the match amount from gross salary next year and put it as a match next year. I confirmed it. As per CPA these plans are very rare but not unheard of.

I can max out 401 K but match will be vested @6K per year for 5 years.

Hence unsure as to what should I do.

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Tamarind
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Re: 401 K match

Post by Tamarind » Fri Oct 11, 2019 12:43 pm

That's a horrendous vesting schedule for a not-great match. How long do you think you are going to stay at the company?

ERISA Stone
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Re: 401 K match

Post by ERISA Stone » Fri Oct 11, 2019 1:19 pm

palciparum wrote:
Fri Oct 11, 2019 11:56 am
Thanks for the replies.

May be I didn't use correct terms but 401 K Employer match does come from HCE salary. They reduce the match amount from gross salary next year and put it as a match next year. I confirmed it. As per CPA these plans are very rare but not unheard of.

I can max out 401 K but match will be vested @6K per year for 5 years.

Hence unsure as to what should I do.
The language regarding the match comes from the employment agreement, and not the plan document, correct?

I have trouble believing this has been questioned legally. It smells like a CODA arrangement, especially given the participant can elect to take the cash or put it in the plan. I might think differently if we were talking about a safe harbor nonelective contribution. The vesting schedule makes it look like manipulation on the company's part.

HomeStretch
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Joined: Thu Dec 27, 2018 3:06 pm

Re: 401 K match

Post by HomeStretch » Fri Oct 11, 2019 1:20 pm

If you plan to stay with this employer for a few years and have any political capital there, maybe it’s time to campaign for a new 401k plan:
https://www.bogleheads.org/wiki/How_to_ ... 01(k)_plan

retiredjg
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Re: 401 K match

Post by retiredjg » Fri Oct 11, 2019 4:10 pm

palciparum wrote:
Fri Oct 11, 2019 11:56 am
Hence unsure as to what should I do.
Unless you have some other plan available, you have no other way to defer taxes on your $19k each year.

You have not told us, but I assume you are in a high tax bracket. Let's say 35% federal. That is a $6,650 tax savings on a federal level, maybe more on the state level. And your income is being reduced another $6k a year (on money you may or may not see again), but that is another $2,100 savings in federal taxes.

If you feel you will be at that employer for a few years, you will get some of it back and you will have benefited from the tax deferral.

If you have a spouse with a 401k plan, maybe that one account is enough tax deferral for you if you do not plan to stay with this employer very long.

If you have any side income, you can open a Solo 401k and put your $19k there, instead of into the work plan. There will be no match and you get to keep the extra $6k in salary.


As per CPA these plans are very rare but not unheard of.
Perhaps you can ask your CPA just what kind of plan this is so that people here can help you do research?

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