Pay deferral contributions and Roth pay deferral contributions
You may contribute to the Plan by deferring a portion of your compensation as either pay deferral contributions, Roth pay deferral contributions, or a combination of both.
You may elect to defer a portion of your compensation and have the Company contribute your deferred compensation to the Plan on your behalf. When taken on a pre-tax basis, these contributions are called "pay deferrals" and are credited to your "pay deferral account." When taken on an after-tax basis, these contributions are called "Roth pay deferrals" and are credited to your "Roth pay deferral account." Contact Vanguard (see "Contacting Vanguard") to make a pay deferral election and/or Roth pay deferral election.
Your pay deferrals and Roth pay deferrals may be any whole percentage up to a combined total of 75% of your compensation during a Plan Year. However, your total pay deferrals plus Roth pay deferrals may not exceed the dollar limit described in "Dollar Limit," and the Company may limit pay deferrals for highly paid employees to ensure that IRS nondiscrimination tests are met.
If, upon becoming eligible to participate in the Plan, you fail to make an election either to make pay deferral contributions or Roth pay deferral contributions, or to opt out, you will automatically be treated as having made a pay deferral election. Your automatic election will start at 3%* of your compensation and will increase by 1% each year until it reaches 8% (15% if you became eligible to participate in the Plan on or after July 1, 2017). This automatic election will cease to apply, however, if and when you make your own pay deferral election or Roth pay deferral election, or elect not to make pay deferral contributions or Roth pay deferral contributions. Amounts contributed to your account under automatic enrollment will not be treated as Roth pay deferrals.
* If you enrolled prior to April 1, 2015, your automatic pay deferral elections will start at 2% of your compensation.
You may change your pay deferral (or Roth pay deferral) percentage or stop or resume your pay deferrals (or Roth pay deferrals) at any time by contacting Vanguard (see "Contacting Vanguard"). Your instructions will be implemented as soon as administratively feasible.
If you think there is a discrepancy between the classification of pay you elected to defer as a pay deferral vs Roth pay deferral and the classification of amounts actually being taken out of your compensation, you should report that discrepancy right away, and in any case by the end of the calendar quarter following the quarter in which discrepancy occurred. Otherwise you will be deemed to have elected the classification that is actually being contributed.
If you think there is a discrepancy between the percentage of pay you elected to defer (or the automatic enrollment percentage, if applicable) and the percentage actually being taken out of your compensation, you should report that discrepancy right away, and in any case by the end of the calendar quarter following the quarter in which discrepancy occurred. Otherwise you will be deemed to have elected the percentage that is actually being contributed.
There are four benefits of deferring compensation under the Plan.
- First, any amounts contributed to the Plan as a result of your pay deferral election are not subject to current income taxes. As a result, your current taxable income will be reduced. Note that this is not true for Roth pay deferral elections because they are taken on an after-tax basis.
- Second, the amount contributed to the Plan as pay deferrals is invested on a tax-deferred basis. This means you will not pay income tax on the investment earnings that are allocated to your accounts. You will pay income taxes only when you receive your benefits from the Plan. As a result, this tax deferral permits a much more rapid accumulation of funds for your retirement. Unlike pay deferrals, however, your Roth pay deferrals will be taxed at the time you contribute them to the Plan, but these contributions and the related earnings will generally not be taxed when you receive a qualified distribution from the Plan. See "Tax consequences of Roth distributions" for more information on the tax treatment of distributions of Roth pay deferrals.
- Third, under current provisions of the tax law, you may be ineligible to make deductible contributions to a traditional individual retirement account ("IRA"). Pay deferrals under the Plan allow you to save for retirement on a before-tax basis.
- Fourth, the Company will contribute 50¢ for each $1 that is contributed to the Plan as a result of your pay deferrals and/or Roth pay deferrals (up to a maximum match equal to 4% of your compensation). The portion of your matching contribution that does not exceed 2% of your compensation will be invested in the Stryker Stock Fund. Matching contributions above 2% of compensation will be invested according to your investment election. See "Company matching contributions" for a discussion of "matching" contributions.
Here is an example of how these benefits can affect you:
If you earn $30,000 per year and you defer 10% of your compensation as pay deferrals, your total deferral for the year is $3,000. The Company contributes your deferral of $3,000 to the Plan for you, along with a $1,200 matching contribution, of which $600 is invested in the Stryker Stock Fund.
In addition, the $4,200 contribution in your name is increased by any discretionary contribution that the Company makes for you and will reflect any change in value of the investment funds in which your accounts are invested. You will not pay income tax on your $3,000 pay deferral, the $1,200 match, any discretionary Company contribution, or any change in investment value until you eventually receive the amount in your accounts after terminating employment (or as a hardship withdrawal or other withdrawal).
Federal law limits the amount of your total pay deferrals (including Roth pay deferrals) in a calendar year to $22,500, subject to adjustments for inflation after 2023 (the "dollar limit").
If your total pay deferrals and Roth pay deferrals under all 401(k) plans or other qualified plans in which you participate during a calendar year exceed the dollar limit for that calendar year (January 1 through December 31), the excess amount of pay deferrals will be included in your taxable income for the year of the deferral. The excess amount will also be taxed again in the year it is distributed to you if it is not withdrawn by April 15 of the following year. To receive a distribution of the excess amount before April 15, your request for distribution must be made to the Plan Administrator by March 1.
The Company will attempt to make sure that your pay deferral contributions and Roth pay deferral contributions to the Plan do not exceed the dollar limit. However, if you participate in another employer's 401(k) plan or a pay deferral simplified employee plan (SEP) during the same calendar year, the dollar limit applies to the total deferral contributions to both plans. Also, if you participate in a tax-sheltered annuity plan of another employer, there is an increased combined limit that applies to deferrals to the Plan and the tax-sheltered annuity. You should monitor your pay deferral contributions and Roth pay deferral contributions so that you do not exceed the dollar limit.