The Coming Squeeze On 401K Plans

Everyone is on your case to stash the maximum amount allowable in your 401(k). With taxes rising, all that deferred income becomes a lot more desirable. But the same bill that lifted tax rates could also seriously curtail the amount of income you can contribute to your 401(k). And as more employees realize this, the pressure will be on companies to provide nonqualified 401(k) plans to make up the difference.

Ironically, those most affected will not be the highest-paid employees but mid-level managers earning from $66,000 to $150,000 a year, says Robert Scharff, a principal with the Todd Organization, a benefits consulting firm in St. Louis.

PROPER BALANCE. The pinch results from the convergence of three rules governing 401(k)s. First, the maximum you can set aside is limited to $9,240 a year, up from $8,994 in 1993. Second, to prevent discrimination, the average percentage saved by highly compensated workers--anyone making more than $66,000--can only be two points higher than the average of those earning below that cutoff at the same company. Thus, if all the lower-paid employees put away an average of 4% of their salaries, the higher-paid group's average couldn't be more than 6%. Third, the maximum salary you can use in figuring your 401(k) percentage dropped from $235,000 to $150,000.

Because top executives will now be basing their contributions on a smaller portion of their salary ($150,000 vs. $235,000), they will be salting away a higher percentage than they used to. So to maintain the proper companywide balance, the percentage allowed for middle-level earners will have to be lowered. That means that they may fall far short of the $9,240 maximum.

One solution is for your company to set up a nonqualified 401(k). This plan allows you to set aside the excess amount in pretax dollars and let it grow tax-free until you retire. The catch is that unlike a regular 401(k), there's no guarantee that you will receive the money when you retire. If the company fails or management changes hands, the funds will be at risk--that is, unless your employer takes the additional step of arranging to set up a special trust to protect you against such possibilities.

If your employer doesn't have a nonqualified 401(k), you can urge him to get one by "bellyaching" to your boss, human resources, or benefits department, says Robert Salwen, a principal at William Mercer, a benefits consultant. Many big companies such as AlliedSignal, Campbell Soup, and Fleet Financial Group already offer them. "Any company with a 401(k) plan will be looking at this over the next year or so," says Todd's Scharff. If yours isn't one of them, you might want to give your benefits administrator a nudge.

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