This post is mostly applicable to former Continental pilots and current United pilots, but the information is somewhat universal:
I’ve enclosed a chart with 2014’s max contribution limits for your reference below. I wanted to touch on maxing out your side of the 401(k) before reaching the 415(c) limits of either $52,000 or $57,500 (over age 50). The break-even salary point for this is $215,000 per year. That is, if you are at exactly 215K for the year you can max out your side at either $17,500 or $23,000, depending on your age, and then the company’s 16% will bring you exactly to your applicable 415(c) limit above. The top end of contributions to your 401(k) for 2014 is $260,000 as you can see from the chart. That means nothing further can be contributed on your behalf to your 401(k) when your salary exceeds this amount. Any excess (of the company’s 16% contribution) over this salary cap will be contributed to your RHA (Retirement Health Account). An issue occurs if your salary is between the break-even point of $215K and the max of 260K. You could conceivably reach the 415(c) limits BEFORE you are able to contribute your personal max of either 17.5K or 23K. This would result in you not taking advantage of the maximum tax deduction the IRS is allowing you off your W-2 salary. You would need to insure that you “front end load” your side of the 401(k) contributions so this does not occur – that is to fully contribute your side to the maximum before reaching your total 415(c) limit. I have calculated this out for you and if your contribution rate is 11% or greater, you should always be able to max out your side before the total reaches the maximum – either $52,000 or $57,500. On salaries above 260K, this is the case as well. Also, once you’ve reached the 415(c) limits, all further company contributions are spilled over to your RHA. As an alternative, if you happen to not want to fund your personal RHA, the only option to accomplish that is to not let the spillage occur over the 415(c) limit. This strategy is to limit your side of the contributions to the point where when your side and the company’s side added together for the entire year total exactly the applicable 415(c) limit. You cannot affect the 16% over the $260,000 but you can affect the spillage before that salary is reached. Let’s look at an example for a person over age 50: At $260,000, the 16% company contribution is $41,600 – so your side would need to be limited to $15,900 in order for the total from both to be $57,500. With this scenario, you would be paying taxes (at your effective tax rate) on the $7,100 that you did not contribute to your side of the 401(k). You have an option of contributing part of that amount, however, to an after tax IRA, currently limited to $6,500 ($5,500 under age 50). The RHA is invested in a conservative strategy and not willable. You, your spouse and dependent children under age 26 can use it. If you are single, widowed or have no dependent children under age 26 and you should die with a balance, the balance is distributed to the rest of the pilots in the plan. Therefore, additional possible yield, plus the ability to will assets to your heirs, can be accomplished by controlling your own after tax IRA, should you choose this as the better option for your needs.
Defined Contribution Plan Limits 401(k) 2014 2013
Max deferral by employee $17,500 $17,500
Catch-up (> age 50) $ 5,500 $ 5,500
Employer + Employee Total 415(c) Limit $ 52,000 $51,000
Employee Annual Compensation Limit
For Calculating Contributions $260,000 $255,000