July ACap ReCap
Can my employer limit my 401k contribution?
Yes and no. The maximum amount you can contribute to your 401k plan is the lesser of $17,500 (for 2014) or 100 percent of your compensation. Your employer cannot further limit how much you can contribute to your 401k plan because these are IRS imposed limits; however, your contributions may be disallowed and returned to you if you are considered a Highly Compensated Employee ($115,000 / year or own more than 5 percent of the business). 401k plans must undergo annual compliance tests to ensure highly compensated employees are not the only employees benefiting from the 401k plan; therefore, the Department of Labor imposes rules that prevent highly compensated employees from contributing to their 401k accounts if not enough non-highly compensated employees in the same company/business are contributing to their 401k accounts as well. If you are a highly compensated employee and you want to max out your 401k plan, encourage the younger and/or non-highly compensated employees to contribute too – it will help you and them in the long run.
Have a financial question? Contact ACap Asset Management at firstname.lastname@example.org or 818-272-8511.
Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Visit us at www.acapam.com