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If an employer is allowed to contribute up to 38K (57K-19K) to your 401K through a match, why don't we have an option to deduct the extra 38K from our salary and count it as the employer match in order to contribute pass the 19K limit?

https://www.investopedia.com/articles/personal-finance/112315/how-401k-matching-works.asp

  • Someone at the IRS has probably thought of that and made it illegal. – RonJohn Dec 26 '19 at 6:29
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    @RonJohn I don't see why it's illegal to ask your employer to make larger contributions to your plan at the expense of reducing your salary. Solo 401K participants and employers already do it. – jgozal Dec 26 '19 at 6:52
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    I don't know the details but I've heard there's a law that prevents employers from offering different 401(k) matching to different employees. Since most employees will want their salary paid directly, that would prevent others from receiving it as a 401(k) match. – Craig W Dec 26 '19 at 13:11
  • @CraigW If you can find a reference for that law, it would make a good answer. There would have to be some exceptions, because I know in some cases when an employer eliminates a pension plan for new hires they give those new hires an increased 401k contribution to compensate, while existing employees continue with the original plan. – nanoman Dec 26 '19 at 13:38
  • the bottom line I think, is that it's illegal for an employer to have large discrepancies between employer contributions made to employees within the same company, so it's hard to ask for a mega-match when others in the company don't want a mega-match. The act of asking for a larger contribution in lieu of a salary is not illegal however and worth giving a try, but unlikely to happen, especially if the employer employs many employees. – jgozal Dec 26 '19 at 17:23
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There are rules regulating "fairness" amongst all employees in a given companies 401k plan outlined here: https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview

Although your proposed scheme may be possible in some circumstances, I would expect that those rules would be difficult to skirt around depending on the distribution of employees that opt for your "mega-match" and those that don't.

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Jumping outside the framing of the question: Even if you cannot get a "mega-match", you can get a similar tax advantage if your 401k allows after-tax contributions and in-plan conversions. In this case, you can contribute (after-tax) the allowed remainder up to the combined $57k, and then convert that balance to a "backdoor Roth 401k". You will not owe tax on those contributions or their earnings when you withdraw them in retirement. Although you don't get the immediate tax deduction, you effectively put away more this way because a dollar left over after paying taxes is worth more than a dollar yet to be taxed.

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  • thank you. I didn't know that worked that way. If the plan doesn't allow in-plan conversions, can I still contribute those after tax contributions to a backdoor Roth 401K after ending my relationship with my employer? – jgozal Dec 26 '19 at 17:10
  • @jgozal After leaving your employer, you can roll over your after-tax 401k contributions to a Roth IRA (I assume that's what you mean). To avoid paying taxes immediately on the earnings from those contributions, you can roll over the earnings to a traditional IRA. You can read more about the "mega backdoor Roth". – nanoman Dec 26 '19 at 18:00

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