Conference 7.286::digital

2391.0. "Want to reduce your current taxable income ??" by CSC32::C_LEE (Clement Lee, DTN 592-4152) Thu Feb 25 1993 10:21

    
    I asked the question => my wife can contribute 18% of her current
    income to 401K, why can't we (DECies) ?? We can only contribute
    maximum of 8% of our current income to 401K. Here's the answer
    I got from Jack Englert, corp benefit consultant.
    
From:	ICS::ENGLERT      "Jack -- 223-9196" 12-OCT-1992 12:11:17.56
To:	CSC32::C_LEE
CC:	ENGLERT
Subj:	Your SAVE 401(k) question

         Clement---

         As a quick comment to your question to the IRS, I believe
         that the Defined Contribution limit that you asked about is
         not 18%, but 25% (up to the dollar limits).  

         In addition, the contributions you make to SAVE are not Tax
         FREE, merely tax deferred.  The IRS will get it's money
         eventually.
         			---Jack

         Initially, when the SAVE plan was established there were
         certain rules that each qualified employee benefit plan
         covered under section 401(k) of the Internal Revenue Code
         must follow.  In particular the Code established a
         discrimination test that each plan must comply with in order
         to remain qualified under ERISA.  The test was then called
         the one-third/two-third test and went as follows: 
         
              - each eligible individual in the top one-third of the
              company based upon current hourly rate of compensation
              is aggregated into one group.  These people were
              considered to be highly compensated; 
         
              - the remaining eligible two-thirds is aggregated into
              another group.  These people were considered to be
              non-highly compensated; 
         
              - for each group, the total amount contributed by that
              group is added and divided by the total compensation for
              that group giving an average deferral percentage for the
              group; 
         
              - the average deferral percentages are compared to each
              other and must be within 3% of each other in order for
              the plan to pass this test. 
         
         You should note that employees who could be in the plan but
         chose not to contribute are included in the calculations for
         both groups. 
         
         Prior to implementing the SAVE plan a study was done to
         determine the highest amount that could be contributed to the
         plan so that this test would be passed each year.  The amount
         was determined to be 8% and the plan was designed with this
         maximum contribution amount in mind. 
         
         The effective date of the SAVE plan is January 1, 1985 and
         for three years the plan passed the IRS requirements. 
         
         Effective with the Tax Reform Act of 1986, effective July,
         1987 for Digital, the government changed the rules with
         regard to 401(k)/SAVE plans.  Replacing the definition of
         highly compensated employee with a complex series of
         conditions that equates, for Digital, to those earning over
         $50,000 and in the top 20% of the company.  This changes the
         test, for Digital, to a one-fifth/four-fifth test,
         significantly altering the grouping of compensation.  In
         addition the IRS code was changed so that the spread between
         highly compensated and non-highly compensated individuals may
         now be only 2%.  The test is applied in the same manner as
         described above with the new constraints. 
         
         Digital did not pass the revised test for the next 4 years
         and only as recently as this year (Fiscal 1992) were we able
         to pass the test.   

         Increasing the 8% maximum for the SAVE program to 10% tends
         to exacerbate the discrimination problem in that
         proportionally more Highly-Compensated employees will
         contribute to the maximum and we may not again pass this
         manditory test. 
         
         We are looking into raising the limit to something over 8%. 
         Once the projected demographic data indicates that we will
         pass the above test, we will proceed to the various approval
         process' necessary to amend the plan.

         If you have any questions, please feel free to contact me. I
         can be reached at Ics::Englert or Jack Englert @MSO.  My DTN
         is 223-9196.
         
         Regards,
         
         Jack Englert
         Benefits Consultant
         
                                           
From:	ICS::ENGLERT      "Jack -- 223-9196" 13-OCT-1992 06:51:25.85
To:	CSC32::C_LEE
CC:	ENGLERT
Subj:	RE: Your SAVE 401(k) question

Clement---

>>	Is the 10% STOCK plan tied to 401K calculation ??

No, they are totally independent programs from a tax standpoint.  The 401(k)
plan is a retirement plan and the contributions are tax deferred.  The ESPP
plan is a company sponsored stock program and taxes are payable when the stock
is sold.   The 10% to stock is not included in with the IRS maximums.

				---Jack

    Jack,
    
    For a long time I was wondering same as you are. Discrimination test
    should not be a show stopper. Other company did have workaround for
    this. Let me give you specific example. M/A com allow upto 14% of
    income to be invested in 401(k). They have a sliding scale for
    percentage which tied to your salary. So let's say for example, you
    are making $60k and somebody else making $25k. Person making $60k
    can contribute only 8% of the salary while person making $25k could
    contribute 14% of salary. This way you can easily meet discrimination
    rule. M/A com also match 6% of the contribution. IRS allow upto $8700
    for 401(k) contribution. 
    
    Bharat Shah
     
    

    Sanders has a nice deal where they match $ for $ an employees
    contribution into a 401(k) plan.
    
    Jim C.
    
    

	How much money did they lose the past couple years?

				Tom_K

    
    Usually companies that match 401K contributions DO NOT have
    a company paid retirement plan.
    
    gb

    
    In todays business climate I would prefer an employer matching 401k
    to a company paid retirement plan. 
    
    		fred deady

    I believe that in the begining that was the plan, for the company
    to match $ for $.  I assume there was a plan to phase out our
    retirement plan and in favour of 401(k).  Neither came about.
    

.7>                 -< let's beat this dead horse some more,ok? >-
    
	OK.  Raytheon makes (partial) matches to employee contributions.
    
    	Why can't DEC?    

    Motorola used to match 1 to 1 in their 401K and we even had a co.
    pension paid plan to boot.  One year, they matched 1.5 to our 1.
    
    The next year they began their downsizing and that's why I'm here!