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Automatic employee contributions for a small business 401(k) cannot exceed what percentage of compensation?

A) 5 percent

B) 10 percent

C) 20 percent

D) 25 percent

A) 5 percent

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B) 10 percent

Correct.

According to the Department of Labor, if a plan is set up as a Qualified Automatic Contribution Arrangement with certain minimum levels of employee and employer contributions, it is exempt from the annual IRS testing requirement that a traditional 401(k) plan must pass. The initial automatic employee contribution must be at least 3 percent of compensation.

Contributions may have to automatically increase so that, by the fifth year, the automatic employee contribution is at least 6 percent of compensation.

The automatic employee contributions cannot exceed 10 percent of compensation in any year.

The employee is permitted to change the amount of his or her employee contributions or choose not to contribute but must do so by making an affirmative election.

The employer must make at least either:

  • A matching contribution of 100 percent for salary deferrals up to 1 percent of compensation and a 50 percent match for all salary deferrals above 1 percent but no more than 6 percent of compensation; or
  • A nonelective contribution of 3 percent of compensation to all participants

Employees can make salary deferrals of up to $17,000 per year for 2012. This includes both pre-tax employee salary deferrals and after-tax designated Roth contributions (if permitted under the plan).

C) 20 percent

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D) 25 percent

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