Two Plus Two Equals One Tax Incentive

I hate accounting policy.

For my 403(b) retirement plan, my employer contributes “5% of [my] base salary up to $34,000; 10% of [my] base salary above $34,000.”  If I make (hypothetically) $68,000, then I should get 5% on half of it, and 10% on the other half — 7.5% on average.  That’s $425 per month.

Sixth graders, are you following this?

Now let’s all guess why my last paycheck shows only $283 (adjusted for my hypothetical salary, of course).  What happened to the other $142?

It turns out my “averaging” technique is wrong.  My employer will contribute 5% until they’ve covered $34,000 in earnings, and then switch to paying 10% for the rest of the year.  Most years this is perfectly fine, since I can’t spend this money until long after the year ends, so the total is what counts.

However, what about this year?  If I was only eligible to join the plan in July (halfway through the year), then I’ll only see 5% contributions all year!  I miss out on that 2.5% difference.

Of course, I used a $68,000 example salary to make the math easier, but really anybody who makes more than that cutoff amount suffers to some degree.  I’m outraged!

(Okay, I’m not really outraged, but I am mildly disappointed to learn that some of my unhatched chickens will never hatch—and they were my retirement chickens!)

One thought on “Two Plus Two Equals One Tax Incentive

  1. cliff claven says:

    This is like the well-known problem:

    A train leaves Chicago at 10am going east at 45MPH. Another train leaves at 11am going west at 75MPH. Where do they bury the survivors?

    In the retirement version: A person starts work in 2005 at 5%. In 2008, he/she switches to 10%. Where do they bury the survivors?

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