The company I am working for said that 401(k) contribution can be based on only straight time pay! The company I previously worked for allowed me to contribute on gross earnings. Has the law changed, or is the current employer wrong?

By Denise Appleby AAA
A:

The regulation (law) that addresses your specific question has not changed. However, both employers may be right. Here's why:

The regulations allow the employer to determine, to a certain extent, what is defined as "eligible compensation/pay" for the purposes of determining contributions to the plan. For instance, some plans include overtime pay in the definition of compensation for salary deferral purposes, while others may not.

Here's an example: assume that the plan does not include overtime in the definition of compensation and limits your salary deferral to 10% of your compensation. If you earn $10,000 as regular (straight time) pay and $1,000 in overtime, you would be allowed to defer up to $1,000 to your 401(k) because your limit will be 10% of your straight time pay.

If you cannot contribute as much as you would like to, all is not lost. If you have extra funds you want to contribute to a retirement account, you may consider making a contribution to an IRA.

This question was answered by Denise Appleby
(
Contact Denise)

RELATED FAQS

  1. What are the 2014 401(k) contribution limits?

    Learn how limitations for 401(k) plans can change; find out what the contribution limits, annual limits and compensation ...
  2. What are qualified retirement plan types?

    Understand the different types of qualified retirement plans and what they mean in terms of employee and employer contribution ...
  3. How does a qualified retirement plan early distribution work?

    Weigh the pros and cons of taking an early distribution from a retirement account. Most early distributions are subject to ...
  4. What are the Roth 401(k) withdrawal rules?

    Understand the requirements for tax-free withdrawal from a Roth 401(k) account, how early withdrawals are taxed and options ...
RELATED TERMS
  1. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  2. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  3. Death Master File (DMF)

    Also known as Social Security Death Index. A list of people whose ...
  4. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...
  5. Peri-Retirement

    A term for the period of time leading up to actual retirement. ...
  6. MyRA

    A new tax-advantaged retirement account that President Barack ...
comments powered by Disqus
Related Articles
  1. Top Financial Frights: Emergencies & ...
    Investing Basics

    Top Financial Frights: Emergencies & ...

  2. Steps To Retiring With A Reverse Mortgage
    Retirement

    Steps To Retiring With A Reverse Mortgage

  3. When Your Job Offers An Awful Retirement ...
    Retirement

    When Your Job Offers An Awful Retirement ...

  4. Top 5 Strategies To Pay For Elder Care
    Retirement

    Top 5 Strategies To Pay For Elder Care

  5. 5 Top Alternatives To A Reverse Mortgage
    Retirement

    5 Top Alternatives To A Reverse Mortgage

Trading Center