401k match

[81lynn]

I was recently switched from salary to productivity based pay. The company keeps 30% of my earnings for overhead and I get 70%. From my 70% comes medical and disability insurance among other expenses. Also out of my 70% comes my "company match" for 401k. Is this legal? I guess it is an avenue to contribute more to my 401k above the $17,000 max for 2012. Is doesn't seem legal to me. I work for a small company and don't exactly trust the person taking care of finances.
Thanks!

[bjl584]

I would think that only the amount that YOU elect to contribute to your 401K should come out of your pay. The company match should be above and beyond that amount and would not come out of your paycheck.

[MonkeyMama]

Actually, this is very legal and common.

I am an accountant, and this arrangement is common among medical practices. Basically, instead of bringing on someone as a partner or a shareholder, this is usually the middle ground. You get to keep x% of all your profits, BUT you have to foot the employer's expenses to pay you (generally payroll taxes, workers comp, retirement match). This is actually a pretty sweet arrangament because you really reap the rewards without skin in the game. If you produce twice as much as anyone else, you get PAID twice as much as anyone else. But this comes with none of the headaches of actual business equity and ownership.

The "match" is basically tax-free income to you. So instead of being paid to you in salary, it is going to your retirement accounts, un-taxed. Usually about $33,000 tax-free per year, for anyone highly paid (not sure why anyone lowly paid would do this?). The problem is when these profit sharing and matches are in place, you can't opt out. Legally, the money has to be matched, or the entire retirement plan can become null and void. Employers can not pick and choose who they match. They usually max out every highly paid employee, and usually every highly-paid-employee welcomes the perk and the tax break.

The reason these are set up in the first place is for tax shelter.

So, basically, you are going to more of a commission type schedule, but you have to work within the confines of the retirement plan, which are subject to many legal requirements. Likewise, no one is going to pay you X% of profits without factoring their costs to employ you. Subtracting overhead (30% in your case) and "all direct employment costs" is a pretty common arrangement.

This is the max you could possibly be paid. Even the owners/partners have to factor their costs when taking draws and salaries - they do the exact same calculation. Gross income minus overhead and direct costs. What's left is left.

[phantom]

I don't know that it's illegal, since there's no law that says the company even has to give you a match. But, it's definitely shady and misleading. I certainly wouldn't call it a match from the company if it's coming out of pay that they would give you no matter whether or not you use the 401k.

Perhaps it was just an accounting mistake? I would question someone on it. I probably wouldn't go straight to the finance person that you don't trust. Maybe go to HR, assuming the company is big enough that there's an HR person who isn't the same person as they one who handles the finances.

Edit: Having read MonkeyMama's post, mine sounds wrong. But, I'll leave it here so you can know you weren't the only one who thought it sounded weird.

[81lynn]

Thanks for the help. I really wanted to make sure that I wasn't fraudulently contributing extra to my 401k. Our match is set at 4% because that's what is was before we changed payment models. Is there any reason not to increase it to maximize the tax benefit? I suppose everyone would have to agree to this. What is the maximum match that we could do? I saw monkeyMama stated $33,000 a year tax benefit. I am not anywhere close to that.

I also have to consider my student loan debt. This is near $300,000. Not atypical for a recent medical school graduate these days. The rates range from fixed 2%-6% on federal loans. I also have private loans with variable rates at about 3% currently. i pay extra on the loans every month, but not sure I should be contributing so much to retirement with such a debt burden.

[jIM_Ohio]

Actually, this is very legal and common.

I am an accountant, and this arrangement is common among medical practices. Basically, instead of bringing on someone as a partner or a shareholder, this is usually the middle ground. You get to keep x% of all your profits, BUT you have to foot the employer's expenses to pay you (generally payroll taxes, workers comp, retirement match). This is actually a pretty sweet arrangament because you really reap the rewards without skin in the game. If you produce twice as much as anyone else, you get PAID twice as much as anyone else. But this comes with none of the headaches of actual business equity and ownership.

The "match" is basically tax-free income to you. So instead of being paid to you in salary, it is going to your retirement accounts, un-taxed. Usually about $33,000 tax-free per year, for anyone highly paid (not sure why anyone lowly paid would do this?). The problem is when these profit sharing and matches are in place, you can't opt out. Legally, the money has to be matched, or the entire retirement plan can become null and void. Employers can not pick and choose who they match. They usually max out every highly paid employee, and usually every highly-paid-employee welcomes the perk and the tax break.

The reason these are set up in the first place is for tax shelter.

So, basically, you are going to more of a commission type schedule, but you have to work within the confines of the retirement plan, which are subject to many legal requirements. Likewise, no one is going to pay you X% of profits without factoring their costs to employ you. Subtracting overhead (30% in your case) and "all direct employment costs" is a pretty common arrangement.

This is the max you could possibly be paid. Even the owners/partners have to factor their costs when taking draws and salaries - they do the exact same calculation. Gross income minus overhead and direct costs. What's left is left.

Thank you. I am taking a stab at implementing 401k plans, and this is a GREAT idea. Thx for post.