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Columns: Dr. Don
Don Taylor, Ph.D., CFA, CFP   Expert: Don Taylor, Ph.D., CFA, CFP
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Reader advised to cash check, move on
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Payroll taxes owed on 401(k) money

Dear Dr. Don,
This year, for my annual bonus of $2,500, I signed a request to have the entire amount put into my 401(k). My company said that when they tried to run the checks, the computer wouldn't accept this. So, they changed my contribution to 90 percent of my bonus, or $2,250. The other 10 percent, or $250, was shown on my check stub with deductions of $155 for the Federal Insurance Contributions Act, or FICA, $36.25 for Medicare insurance and $15 for state disability insurance, or SDI. I received the balance of $43.75 as a check.

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I have three questions: Why couldn't I put 100 percent into my 401(k)? I am not anywhere near the $15,500 limit. I think it had to do with the way they input it into the computer. Also, should I have had the above amounts deducted? I thought a "pre-tax" contribution meant the money was taken out before all the taxes. Lastly, because they always match 3 percent of my normal contributions, shouldn't they have contributed 3 percent of the $2,500 (or $2,250 in this case) toward my 401(k)?

I have not cashed the check. I want to know how I should handle this first.
-- Dianne Dénouement

Dear Dianne,
You company properly withheld FICA, Medicare, and SDI taxes from your annual bonus. The tax-deferral is for federal, and possibly state, income taxes -- not payroll taxes. The bright side is that you are not reducing your future Social Security benefits by contributing this money to the 401(k) plan.

It's likely that the 90 percent limitation is company policy to allow for the withholding of these taxes. As the table below shows, you paid 8.25 percent of your $2,500 bonus in these taxes.

Taxes on bonus money:
FICA $155.00 6.20%
Medicare $36.25 1.45%
SDI $ 15.00 0.60%
Total $206.25 8.25%

Whether or not the company's matching contributions extend beyond your annual salary depends on the provisions in its 401(k) plan. You are entitled to a copy of the 401(k) plan documents, but just asking the human resources department can work, too.

If your contribution of your annual bonus was eligible for the company match, it wouldn't necessarily show up on your payroll report. But you would see it on your 401(k) benefit statement or on a statement from the investment company handling your 401(k) account.

Cash the check and move on.'s corrections policy -- Posted: Nov. 13, 2007
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