Contribution Limt as a Percentage of Compensation

The last time I researched this topic, the IRS had limited contributions to the lesser of some fixed dollar amount (currently 16,500 for 2009) or 25% of W-2 Compensation.

My understanding now is that the percentage contribution is now 100%. The most clear statement of this that I found on the internet was from a "California State University HR Letter" (http://www.google.com/url?sa=t&source=web&ct=res&cd=10&url=http%3A%2F%2Fcsu.net%2FHRAdm%2Fpdf2008%2FTL-BEN2008-13.pdf&ei=Q5gpSaffNqCc8QS-2qTwAg&usg=AFQjCNG7c7ACa6BNfAKubTAOUv9ROXStnw&sig2=dt_nqCcOs0nQZ3Nb2llTYg). I've included the excerpt below:

Elective Deferral Limits
The Internal Revenue Code (IRC) establishes specific limits that govern amounts an individual can contribute to pre-tax salary reduction retirement plans, such as 403(b), 401(k) and 457(b) plans. Two limits determine the
amount that an employee may contribute on an annual basis. Effective 2009, the employee may contribute the
lesser of:

1) The IRC Section 402(g) “elective deferral limit” for 403(b) and 401(k) plans, which is $16,500; or

2) The IRC Section 415(c) “percentage of compensation” limit, which is defined as 100% of adjusted gross salary up to a maximum of $49,000. (See Attachment A for the definition of adjusted gross salary.) Plus:

...


Is this accurate? I tried to look through the appropriate sections of the IRC, but quickly realized that would take considerable time to find and understand exactly what I'm looking for.

Any support is greatly appreciated.

Regards

For 2009, an individual can defer a maximum that is the lesser of their earned income or $16,500. Some plans may impose a lower limit.

For 2009, the total contributions from an individual PLUS the employer contribution can not exceed 100% of compensation up to $49,000.

Many thanks for the quick response. Did this change just occur for 2009 year or has it been in effect for some time?

Sirsavalot,

These are the numbers for 2009. These numbers are some of the limits that are adjusted periodically for inflation.

Apologies, I should have been more specific. I was refering specifically to the percentage of compensation. This used to be capped at 25% of W-2 (my memory stems from the 98' timeframe), but has subsequently changed. I was curious if this was introduced for 09' or had been modified much less recently.

Thanks

Sirsavalot,
Are you self-employed or are you specifically referencing an employer's sponsored plan?

Being self-employed changes all of that helpful advice that you received from ClydeWolf.



Kenneth Besada
Insurance/Financial Services
EMAIL: Kbesada@FarmersAgent.com

Kenneth,

Both my wife and I work, have access to 401ks, and neither of us are self-employed. My wife currently works part time and we live well within our means, so her income can be entirely directed towards savings. With the increased contribution limit as a percentage of W-2, we can shelter significantly more of her income from taxes to significant advantage (of course, this assumes taxes are heading up, the market eventually cooperates and 401Ks aren't "nationalized" ;-).

The advice here has been especially helpful. I was just curious when the contribution limit as a percentage of income changed. We would only be able to take advantage for 09, since my wife's employer has just announced the ability to direct any percentage of income to 401K savings.

Regards

sirsavalot, I think the 25% figure you're coming up with is in regard to employer-deductibility of contributions. The limit for deduction for business expense is the lesser of its contributions or 25% of compensation. (Compensation considered for each employee is limited to $230,000 in 2008, $245,000 for 2009 and subject to annual cost-of-living adjustments for later years.)

The only difference that I can think of offhand for the self-employed is that this figure is adjusted to 20% of compensation.

I don't claim to know the answer, but I think I can clarify the question. As I understand it, if you make $20k (arbitrarily small amount) in 2008, you're allowed to contribute the full $15.5k.

Apparently this was not the case a few years ago, and the question is when did it change. Reference this article from fool.com which says you can contribute no more that 25% of your compensation.

http://www.fool.com/retirement/retireeport/2001/retireeport010423.htm

"What's that? You say will earn $35,000 this year, but you still wish to contribute $10,500 to your 401(k)? Hmmm... lessee here... $10,500 divided by $35,000 comes out to... hey, that's 30% of your pay! It's great that you want to save that much, but that contribution is too high under the law. Your 401(k) contribution can't exceed more than 25% of pay, so that means your 401(k) deposit will be limited to a maximum of $8,750 this year."

There are several sites that provide tables showing limits by year.

This one happens to be my favorite: : )
http://www.401ktest.com/pages/terminology.asp#tables

Regarding the % limit (% of wages); this is determined by the plan document, correct? I know the limit can be up to 100%, but if the company is using a plan document with a lower %, then that's the limit for the plan.
Please correct me if I'm wrong.

Have a great day!