Jeff Morgan, of Allied Insulation Supply, noted “It occurred to me that the temporary 2% reduction in the employee portion of the Social Security Tax is a great opportunity for participants to increase their 401(k) contributions without reducing their net pay. Of course, this approach will defeat the purpose of providing more “stimulus” dollars to the economy but it seems like a great idea to me. I have shared this idea with our participants and have received a great reaction”
Here’s the email Jeff sent to his participants:
As part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation act of 2010 signed into law on December 17th, 2010, the employee portion of the Social Security Tax will decrease from 6.2% to 4.2% for all of 2011. This is a great opportunity for you to increase your 401(k) contribution by 2% and not see any decrease in your take home pay! In fact, since there is not tax withheld against the 2% you would put in your 401(k), your take home pay would still go up. Also, if your current 401(k) contribution is not at or above 6%, Allied will match your increased contribution 50 cents on the dollar up to 6%.
UPDATE: We got a LOT of great response to the suggestion about taking advantage of the one-year reduction in FICA withholding to encourage participants to take that 2% and put it in their workplace savings plan instead (see SURVEY SAYS: Have You Made a FICA Inspired Participation Push?).
However, several readers also noted that LOTS of withholding changes take place at the beginning of the year, and so you may want to be careful about touting the “no change” in take home pay angle.
Additionally, a couple of readers noted that the expiration of the Making Work Pay federal income tax credit was reflected in the withholding tables – and, all other things being equal, some lower-paid workers could actually see a reduction in take home from THAT change – and attribute it to the change in withholding.
All in all, though – a great and welcome suggestion!
Here’s hoping it catches on! If you have done, or will be doing something with this, let us know how it goes. Email me at email@example.com.
You can find more information about the FICA changes at: http://www.plansponsor.com/IRS_Releases_Pay_Withholding_Change_Guidance.aspx
See also Principal Says Payroll Tax “Holiday” an Opportunity to Save at http://www.plansponsor.com/Principal_Says_Tax_Holiday_an_Opportunity_to_Save.aspx
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