IBM recently announced plans to reduce the frequency of matching employee 401(k) contributions to only once a year. This will take place on December 31st of each year. While IBM is only the first company to announce the change, they did employ as much as 105,000 U.S. workers as of 2007 (disclosed during a U.S. Congressional testimony). We expect IBM’s announcement to be the start of a trend in the employee benefits space. Will this impact your 401(K) plan in the future?

How 401(k) plan matching programs work
Most employers will match employee 401(k) contributions up to a certain percentage of their salary. Typically, 5% to 10% of employee salaries will be matched for the contributions made. There are limits though. The IRS actually doesn’t allow you and your employer’s contribution to exceed the lessor of 100% of your salary or $50,000 for 2012, $51,000 for 2013. Individually, employees cannot contribute more than $17,000 in 2012 and $17,500 in 2013 unless they are 50 years old or more. Older employees can contribute an additional $5,500 “catch-up” contribution. Whichever amount you decide to contribute for the year, your employer will usually match every pay period. For instance, if you set aside $15,000 of your $100,000 salary to your 401(k) plan and your employer matches up to 10% of your wages or $10,000, then a total of $25,000 will be allocated to your 401(k) for the year. If you are paid bi-weekly, then $577 of your paycheck will be allocated to your 401(k) and $384 will be matched by your employer every pay-period.

What’s the change to IBM 401(k) plans going forward?
Instead of IBM matching your contribution with $384 every pay period, the company will only match one-time for $10,000 at December 31st. This lump sum amount also will only be paid to you if you are still an employee as of the end of the year. For instance, if you left the companry or were laid off in November of that same year, you would lose out on the 401(k) matching contribution for the year.

What are the drawbacks of a lump-sum payment for the employee?
The risk is being shifted to the employee as they will need to stay the full year to receive the matching contribution. In addition, by only receiving a lump-sum payment at the end of the year, employees will not be able to utilize the strategy of dollar-cost averaging. This strategy helps employees reduce their risk by purchasing investments at various price points throughout the year.

Should I still contribute to my 401(k) if my employer follows IBM’s lead?
Of course. While you won’t be able to manage your employer’s contribution during the year should they elect to pay a lump-sum 401(K) matching contribution, you can still contribute yourself each pay-period. Your 401(k) will grow less during the year as compared to previous years.

More Questions? Ask your 401k tax questions or find accountants in new york online.

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