Too Wealthy for Your 401(k) Plan?
November 24, 2010
When lower-paid workers cut back or stop making 401(k) contributions -- as many have done since the recession began, according to industry experts -- companies that don't meet certain requirements are forced to reduce or refund the retirement-plan contributions of the higher earners.
Many high earners only now are getting the unwelcome news that they will have to cut back on this year's remaining 401(k) contributions or risk getting some of that money refunded in 2011 -- and then be liable for income taxes on it, says the Wall Street Journal.
- So-called nondiscrimination rules prohibit a company from letting "highly compensated" workers contribute a substantially greater percentage of their salaries than other employees do.
- Right now, "highly compensated" is defined as earning more than $110,000 or owning at least 5 percent of the company.
- Employers that don't meet the rules can opt to make extra contributions to the accounts of lower earners, or they can offer a "safe harbor plan" that offers features such as a company contribution that vests immediately.
- If they don't have a safe harbor plan and run afoul of nondiscrimination rules, companies can make a contribution on behalf of the lower-paid employees, but most simply warn high-earning employees that they need to lower their contribution -- or refund the excess amount to them.
Another factor behind the reduced savings rates: Many companies have suspended their 401(k) match, says the Journal.
- A survey released in June by Towers Watson found that 18 percent of the 334 companies with 1,000 or more employees it surveyed had reduced or suspended their matching contribution to their 401(k) plans.
- Almost half -- 49 percent -- haven't restored it yet.
Source: Jilian Mincer, "Too Wealthy For Your 401(k) Plan?" Wall Street Journal, November 20, 2010.
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