Tax implications for a 100% 401k contribution limit

Question

My company permits a contribution of a 100% of the paycheck towards the 401k. My question is, if I were to pick a 100% contribution amount, would I be liable for any taxes in the number of paychecks that it would take to reach the annual contribution limit?

For example, given that the 2013 contribution limit is $17500, and if I earn $2500 per week (pre-tax), it would take me 7 weeks to reach the limit. In those 7 weeks, would I pay any taxes at all (be it state, federal or Social Security/Medicare)?

Adding company match information, based on a comment: "Your employer will make Safe Harbor Qualified Automatic Contribution Arrangement matching contributions to your account based on your contributions. The amount will equal 100% of the first 1% of compensation you contribute to the Plan and 50% of the next 5% of compensation you contribute to the Plan."

Will this be impacted by the contribution over just a short timeframe (7 weeks in the example?)

Answer 1

The amount you contribute will reduce the taxable income for each paycheck, but it won't impact the level of your social security and medicare taxes.

A 401(k) plan is a qualified deferred compensation plan in which an employee can elect to have the employer contribute a portion of his or her cash wages to the plan on a pretax basis. Generally, these deferred wages (commonly referred to as elective contributions) are not subject to income tax withholding at the time of deferral, and they are not reflected on your Form 1040 (PDF) since they were not included in the taxable wages on your Form W-2 (PDF). However, they are included as wages subject to withholding for social security and Medicare taxes. In addition, employers must report the elective contributions as wages subject to federal unemployment taxes.

You might be able to keep this up for more than 7 weeks if the company offers health, dental and vision insurance. Your contributions for these policies would need to be paid for before you contribute to the 401K. Of course these items are also pre-tax so they will keep the taxable amount at zero.

If there was a non-pretax deduction on your pay check that would keep the check at zero, but there would be taxes owed. This might be union dues, but it can also be some life and disability insurance polices. Most stubs specify which deductions are pre-tax, and which are post-tax.

Warning. If you get the company match some companies give you the maximum match for those 7 weeks, then zero for the rest of the year. Others will still credit you with a match at the end of the year saying if you should get the benefit. It is not required that they do this. Check the company documents. You could also contribute post-tax money, which is different than Roth 401K, for the rest of the year to keep the match going.

Note: If you are turning 50 this year, or are already 50, then you can contribute an additional $5,500

Answer 2

In addition to the prior answer, talking from experience, you get into trouble if you surpass the contribution limit and your employer continues to deposit money above the IRS maximum allowed. When that happens, you have until April to take out the excess contribution and earned interest on that chunk of money and included in your tax return or else you get a steep tax penalty in addition to being double taxed ( for the current and next tax year). Also from experience, payroll departments will most likely get this wrong and it will end up in a compliance mess with you picking up the tab on your tax bill. Don't let it happen!!!