Question

You have just begun work at XYZ Manufacturing Company. Among its benefits offerings is a generous qualified 401(k) plan with an employer match. In 2015, your annual salary is $45,000 and you are age 55. You’ve decided to contribute 10 percent of your annual salary to your 401(k) plan even though the Internal Revenue Service allows you to contribute up to $24,000 in 2015 ($18,000 plus a $6,000 catch up contribution for employees age 50 or more). The annual addition is $53,000.

Questions: 9-9. How much more money would you need to contribute to meet the allowable maximum contribution?

9-10. In 2015, the company offers a $0.75 match for each dollar that you contribute between 3 percent and 6 percent of your annual salary. How much is the company match based on your 10 percent contribution?

9-11. Based on the sum of your answers to questions 9-9 and 9-10, what is the difference between the IRS maximum annual addition for 2015 and the total contribution to your 401(k) plan?

Answer 1

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9-9. How much more money would you need to contribute to meet the allowable maximum contribution?

As an employee of XYZ Manufacturing, I am currently contributing ten percent of my salary to a 401(k) plan, or $4,500 annually. My salary of $45,000 multiplied by 10 percent will give me the $4,500 yearly contribution amount. Although the maximum allowable amount is $18,000, plus an additional $6,000 being above the age of 50, I am contributing substantially lower. As a matter of fact, I am contributing $19,500 less than the maximum allowable amount. That comes down to $24,000 maximum allowable amount minus $4,500, which brings me to $19,500 that I could be contributing. Being a new employee was one reason for not contributing more. However, after reviewing my paychecks and seeing that I will have plenty of Net Pay after all other benefits and taxes have been deducted, I will most likely consider increasing that 10 percent contribution to 20 percent before the next payroll cycle, then gradually increasing thereafter.

$ 45,000.00	Annual Salary
10%	Contribution
$    4,500.00	Employee Yearly contribution
$ 18,000.00	Maximum for year 2015
$    6,000.00	Catch-up (Age 50+)
$ 24,000.00	Total Maximum Allowable Amount
$ 19,500.00	Possible Additional Contribution Difference

9-10. In 2015, the company offers a $0.75 match for each dollar that you contribute between 3 percent and 6 percent of your annual salary. How much is the company match based on your 10 percent contribution?

With the company matching $0.75 to each dollar to the 10 percent I am contributing, that is an additional $3,375 to my 401(k). With the $4,500 plus the $3,375, I will have contributed a combined total of $7,875.00 with the company match.

$            0.75	Company match
10%	Currently contributing
$    4,500.00	Employee Yearly contribution
$    3,375.00	Total Company Match
$    7,875.00	Total contribution EE & ER
$ 53,000.00	Annual Addition
$        125.00	difference in Annual Addition and Total Contribution

9-11. Based on the sum of your answers to questions 9-9 and 9-10, what is the difference between the IRS maximum annual addition for 2015 and the total contribution to your 401(k) plan?

The difference between the IRC (Internal Revenue Code) maximum allowable annual addition and the total contribution to my 401(k) plan is $125.00. If the Annual Addition for 2015 was $53,000, and total contribution for employee and employer contribution is $$7,875 plus my salary of $45,000, then there is a difference of $125; which is the lesser of the two ( i.e. annual addition and the combined contribution of employee and employer, respectively). Annual addition is the maximum allowable contribution to a participant’s account in a defined contribution plan, such as a 401(k) plan. In 2015, annual additionally are limited to the lesser of $53,000, or 100 percent of the participant’s compensation mainly based on the sum of employer and employee contributions.

Today, there seems to be economic uncertainty, especially when it comes to retirement. As a young person who just got this new job, retirement may not be at the forefront of my mind, however, using the company match to contribute something for my future only seems like the most logical thing to do. Contributing something is always better than not contributing anything, and you must start somewhere. Getting in the habit of saving for retirement should be second nature when it comes to a deduction from your paycheck. In a defined contribution plan, the employer, or XYZ Manufacturing, along with the employee, contributes to this plan. Account balances mainly depend on many different factors such as contribution amounts, company matches, and investment performance. These accounts are portable, where if I were to leave XYZ Manufacturing, my 401(k) would go to the next company I would work for.