Question for CMR, ASA, and QX captains

Dave Benjamin

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Has anyone been told they can't contribute the max of $14000 to their 401K since other employee groups aren't participating at a high enough level?
 

Caveman

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No, I haven't heard anything like that.
 

Andy Neill

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Dave,

I don't think this is a matter of any company's policy. It is an IRS issue. The following is from a Fidelity website:

"Highly-compensated employees

There are rules to make sure that an employer does not discriminate and unfairly favor its highly compensated employees through a 401(k) plan. The term highly-compensated employees includes a person(s) who was a 5% owner at any time during the current or preceding year. The term also includes an employee who had the compensation of more than $95,000 in 2005. (Note the compensation used to determine if an employee is highly compensated is the amount of compensation from the preceding year.) Generally, to make sure a 401(k) plan is compliant, each year the plan must pass a non-discrimination test. (Note that some plans are designed so that they do not need to pass these tests each year.)

These tests generally compare the amounts contributed by and on behalf of highly compensated employees to those contributed by and on behalf of the non-highly compensated employees. As long as the difference between the percentages of these two groups is within the Internal Revenue Code's guidelines, the plan retains its tax-qualified status. If the plan does not pass the tests, the plan must take corrective action or lose its tax-favored status."
 

Dave Benjamin

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Andy,

I think the difference is at unionized airlines the 401K for the pilots is a separate program so participants are not limited to a lower contribution due to lack of participation of lower paid employees.

I'll shoot you an email that will explain why I'm asking.
 

viper548

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Hey guys,
I'm new, what is our limit for 401k contributions?
 

Andy Neill

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viper548 said:
Hey guys,
I'm new, what is our limit for 401k contributions?
In 2005, a worker can contribute up to 100% of pay not to exceed $14,000. A worker over 50 can contribute an additional $4,000 as a catch up payment. Next year it will be $15,000 and $5,000.

What Dave is alluding to however, is the restriction placed on some executives or "highly compensated employees". The definition of a highly compensated employee in 2005 is above $95,000/yr. In order to demonstrate that the company's 401k plan does not offer a disproportionate advantage to highly compensated employees, it must demonstrate equivalent participation rates. There are some trigger points used to measure that. As an example (NOT real world numbers), let's say that non highly compensated employees put an average of 2% of their pay into 401k while their highly compensated couterparts put in 10%. If the IRS uses 4% spread as a trigger, they could rule that the limit on the highly compensated participation would n 6% (2% + 4%). With that, the copmpany would refund to the highly compensated employees 4% of their contributions (10% -6%) as taxable income. Someone making 140,000 a year and contributing 10% in 401k would find their tax free contribution reduced from $14,000 to $8,400 and an additional $5,600 in taxable income, while a "lowly" compensated employee making $70,000 could contribute a full $14,000 or 20% of his pay tax free.

Some would suggest that an avenue of relief would be to designate the pilots as a separate group so that they would not be impacted by the lower contributiuon rates of their co-workers. I don't see how this would be allowed any more than executives being designated a separate group.

The surest method of relief would be to encourage all lower paid workers to contribute as much as they could stand to increase the average contribution level. When this higher figure (6%) would be added to the trigger level (4%), that could get the rates up to the point (10%) where people at the bottom of the highly compensated group could contribute the maximum allowed.
 

viper548

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Thanks Andy,
I'm at 6%, and I'm first year.
 

Dave Benjamin

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Andy Neill said:
Some would suggest that an avenue of relief would be to designate the pilots as a separate group so that they would not be impacted by the lower contributiuon rates of their co-workers. I don't see how this would be allowed any more than executives being designated a separate group.
One of our pilots did some research and from what he said pilots at unionized airlines are required to have 401K's that are separate from other bargaining units. If that's the case it puts a senior SKYW pilot way behind a colleague at most other carriers in terms of retirement saving potential.
 

DoinTime

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Dave Benjamin said:
One of our pilots did some research and from what he said pilots at unionized airlines are required to have 401K's that are separate from other bargaining units. If that's the case it puts a senior SKYW pilot way behind a colleague at most other carriers in terms of retirement saving potential.

It is not required for Unionized groups to have their own plan however many do in order to exercise a degree of control over it.
 

Dave Benjamin

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I'd like to hear from someone at ASA, CMR, or QX that grossed in excess of 95K and was able to contribute somewhere in the vicinity of $14000 to his/her 401K without difficulty.
 
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