How should we apply the pretax contribution limits for 401(k)s?

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in Office Management,Payroll Management

Question: An employee has asked if she can continue to make pretax contributions into her 401(k) plan even after her compensation reaches the annual salary limit of $255,000. Our benefits department has never encountered this question before. Can she do so?

Answer: Yes. Unless your plan cuts off pretax contributions after the first $255,000 in salary earned, pretax contributions are applied uniformly to em­­ployees’ pay. So employees may continue to make pretax contributions, up to the pretax limit of $17,500, even if their annual salary will exceed $255,000.

Employer matching contributions are a little trickier. If, for example, your plan requires a 50% match on pretax contributions, up to 5% of employees’ compensation, you can only use up to $255,000 of salary when applying the matching formula.

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