100% employee contribution to 401K, how to handle employee paid social security and medicare?

Question

An employee earns $12,000 a year and wants to defer $12,000 as an employee contribution to 401K:

1. Does the employee need to pay employer the employee portion of social security and medicare?
2. Can employer still contribute 25% as employer contribution?

Answer 1

For question #1: A traditional 401K reduces your income, but not your FICA taxes, which means the employer must first deduct the employee portion of FICA from your paycheck, and the remainder is then eligible to be contributed to your 401K. Interesting idea but I don't believe you could offer to pay the FICA taxes on the side to increase the contribution amount.

For question #2: Yes, the employer contribution can still be made, and since it's typically based on the employee's gross amount, it would not be affected by how much the employee contributes, as long as the minimum threshholds are met.

As a side note, if this is the employee's only income, they may be better off contributing to a Roth 401K, as the income tax amount would be low, possibly $0 after deductions.

Answer 2

Every company I have worked for has limited the percentage of gross pay that could be sent to the 401(k). It has typically been 67%, 75% or in one case 90%. The limit was in place because of FICA, and other possible deduction for optional benefits such as health, dental, and vision insurance. It as also covered optional items such as a donation to charity (United Way), purchasing US savings bonds, and even the coffee fund.

These taxes and deductions have to be accounted for before sending money to the 401(k).

The employer sets the rules regarding how they calculate the employer match, as long as they don't discriminate and they keep the combination of employee contribution and employer match below the maximum annual amount ($57,000.00 in 2020).