How do so many HCEs contribute the max to 401k

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Eric in DC
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How do so many HCEs contribute the max to 401k

Post by Eric in DC »

Hey all-

I might have brought this up in the past, but I repeatedly read, mostly on portfolio check threads, how people with high income contribute 17.5k to their 401k. It seems so common but from everything I've read it seems like a rarity for this to be possible. Is there something I'm missing? My handbook at work states that I have a 3% limit as a HCE but what would happen if I did more? Why can so many people on the forum do this?

Thanks!
Texas hold em71
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Re: How do so many HCEs contribute the max to 401k

Post by Texas hold em71 »

HCEs are allowed to contribute like everyone else as long as the plan passes an annual non-discrimination test. The test requires lower paid employees to participate at certain levels. The rule is there to make sure the plan is benefitting all levels of employees not just the higher ups. Maybe your company fails this test every year and has limited the amount HCEs can contribute? At my company, about every two or three years, our plan will fail it and I get a few hundred bucks kicked out. We have auto enrollment and a fair amount of employee education aimed at increasing participation and that may help with getting lower paid employees to participate.
livesoft
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Re: How do so many HCEs contribute the max to 401k

Post by livesoft »

A decent company match can help the non-HCEs contribute enough so that the HCEs can contribute the max.

A so-called safe-harbor 401(k) plan will have the employer make enough contributions for non-HCEs so that HCEs can contribute the max. Here is a pdf link about safe harbor plans: https://www.lfg.com/lfg/rfs/docs/doc/Sa ... nation.pdf
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Eric in DC
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Re: How do so many HCEs contribute the max to 401k

Post by Eric in DC »

So if I'm understanding this correctly, I could feasibly contribute more than the 3%? My company has 10k employees, what are the odds that's me contributing more than the 3% would shift the company's HCEs over the top for contributing more than allowed as a whole?

What's my worst case scenario if I just keep contributing? I get a check back? I wouldn't be in trouble with the govt would I?
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Re: How do so many HCEs contribute the max to 401k

Post by rob »

The HCE limit is a per company thing, so while yours might be 3% mine is 10%.... same issue though - cannot get close to the IRS limit. The funny thing is that those with very high incomes can get to that IRS limit anyway even with a percent limit (not talking about top hat type plans here which sre a different thing). In my case... a small income bump REDUCED how much I could contrinute to the 401K plan :oops: It's stupid.....
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Eric in DC
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Re: How do so many HCEs contribute the max to 401k

Post by Eric in DC »

Debating whether or not I should kick it up to 50% for the rest of the year and see what happens. Does anyone have any experience with over contributing as a HCE?
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Re: How do so many HCEs contribute the max to 401k

Post by noco-hawkeye »

If you over contribute as an HCE then at the end of the year the 401k admin will issue you a balance back to keep you at the correct percentage and make sure everything is in order. There will be extra taxes at this point where the employer may or may not do withholding for you, but this extra income is certainly going to see some taxes.

As someone else stated, many companies become a "safe harbor" 401k, which eliminates the HCE provision. A company does this by doing something extra to ensure everyone get's a certain level of benefit from the 401k, and the government then gives them a free pass to let HCE's go crazy.

I recently switched to a company where I fell into the HCE bucket, and now am limited. Luckily, my new company is being bought out by a company with a safe harbor 401k. 3% would stink, I'm stuck at 7%. :annoyed

One more thing, during the first year of employment (a partial calendar year) - I do not have the limit. It's when I have worked for them from Jan 1 - Dec 31 that the limit applies in my case.
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Re: How do so many HCEs contribute the max to 401k

Post by nisiprius »

You need to delicately ask your HR department about this. The IRS has rules that are intended to keep companies honest and to insure that the 401(k) is really and truly a companywide plan, and isn't just used by "highly compensated employees." There are rules regarding the amount of participation there needs to be from employees who are not HCEs. The company is expected to do a good job of educating employees, and incentivizing them by providing an employer match, so that there is broad participation. The special limits on HCEs only kick in if the company has been naughty, which is why you need to ask delicately about it.

I'm very surprised your company says there is a "3% limit." At the companies I've worked for, it was a dollar limit, and the number of dollars wasn't known until the end of the year when the calculations were completed, so you had to make a guesstimate. When I overcontributed, the next year the 401(k) administrator mailed me a check for the excess amount, and I then had to use some IRS forms that were new to me and read some complicated directions to square it with the IRS, but basically it was just paying back the tax break on the excess amount. At my employer, there wasn't any such limit until they eliminated the company match in an economy move, and surprise, surprise, participation by non-HCE's dropped. The dollar limit was only a few thousand dollars less than the maximum.

Maybe your company's 401(k) contributor doesn't want to be bothered by mailing out checks or calculating exact numbers and just wants HCEs to keep their contributions way way down so there's no chance of going over?
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THY4373
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Re: How do so many HCEs contribute the max to 401k

Post by THY4373 »

I would fall under HCE guidelines based on salary but I will do the 17.5k max this year (for those us under 50), and on top of that I also do the after-tax non-Roth contributions and roll over to Roth IRA (the so called "mega backdoor Roth"). The latter is not protected by safe harbor provisions as I understand it. So basically employer and I are contributing a combined $52k/year (pre and post tax). My plan is not safe harbored and by the same token the documentation make no mention of HCEs so I have no idea what is going and I am not going to complain.

Wife is also an HCE and is limited to 10% of salary/year by her employer (different than mine obviously).
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Re: How do so many HCEs contribute the max to 401k

Post by livesoft »

Eric in DC wrote:Debating whether or not I should kick it up to 50% for the rest of the year and see what happens. Does anyone have any experience with over contributing as a HCE?
I have overcoontributed in the past. Here is what happens: The 401(k) plan conducts an audit in March or later. The plan administrator determines if the plan fails a test (as described in the pdf I linked) and if so, computes the amount of contributions to refund to the folks who overcontributed. Those folks get a check and must add the money to their income for the year they receive the check. (It was not always so, in the past they had to add the income to the previous year's income. This could require filing an amended return if they had already filed a tax return.)

More to read: http://www.401khelpcenter.com/mpower/fe ... EUM7Usg2Do
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ERISA Stone
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Re: How do so many HCEs contribute the max to 401k

Post by ERISA Stone »

THY4373 wrote:I would fall under HCE guidelines based on salary but I will do the 17.5k max this year (for those us under 50), and on top of that I also do the after-tax non-Roth contributions and roll over to Roth IRA (the so called "mega backdoor Roth"). The latter is not protected by safe harbor provisions as I understand it. So basically employer and I are contributing a combined $52k/year (pre and post tax). My plan is not safe harbored and by the same token the documentation make no mention of HCEs so I have no idea what is going and I am not going to complain.

Wife is also an HCE and is limited to 10% of salary/year by her employer (different than mine obviously).
Just curious - approximately how many HCEs/ non-HCEs do you have? It seems it would be difficult for you to pass nondiscrimination test if you are maxing out after-tax contributions because they should be included in the ACP Test with matching contributions. Do you have NHCEs that also make significant after-tax contributions?
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Eric in DC
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Re: How do so many HCEs contribute the max to 401k

Post by Eric in DC »

livesoft wrote:
Eric in DC wrote:Debating whether or not I should kick it up to 50% for the rest of the year and see what happens. Does anyone have any experience with over contributing as a HCE?
I have overcoontributed in the past. Here is what happens: The 401(k) plan conducts an audit in March or later. The plan administrator determines if the plan fails a test (as described in the pdf I linked) and if so, computes the amount of contributions to refund to the folks who overcontributed. Those folks get a check and must add the money to their income for the year they receive the check. (It was not always so, in the past they had to add the income to the previous year's income. This could require filing an amended return if they had already filed a tax return.)

More to read: http://www.401khelpcenter.com/mpower/fe ... EUM7Usg2Do

So at the end of the day there isn't much risk here. Worst case scenario is I get a check back and pay taxes that I would have paid anyway. Best case, my company passes the test and I keep the money in. Right?
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Re: How do so many HCEs contribute the max to 401k

Post by THY4373 »

ERISA Stone wrote: Just curious - approximately how many HCEs/ non-HCEs do you have? It seems it would be difficult for you to pass nondiscrimination test if you are maxing out after-tax contributions because they should be included in the ACP Test with matching contributions. Do you have NHCEs that also make significant after-tax contributions?
Honestly I doubt there are too many people HCE or otherwise doing after tax-contribs as I have explained the process to a number of folks and mostly got blank stares. Without revealing my employer it is a large employer but it is somewhat unique legally and I suspect that might have something to do with it. But in the 76 page plan document there is not one mention of HCE. Also the spreadsheet they give you for optimizing your contributions makes no mention of HCEs. As I said I don't understand why it works but it does and has for the last 2.5 years I have been doing this.

Edit: It is possible strictly speaking the plan is not a 401k plan. The only mention of 401k in the aforementioned 76 page document on closer inspection is in reference to the Roth 401k. The pre-tax accounts make no mention of 401k.
Last edited by THY4373 on Mon Oct 20, 2014 8:39 am, edited 1 time in total.
ERISA Stone
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Re: How do so many HCEs contribute the max to 401k

Post by ERISA Stone »

THY4373 wrote:
ERISA Stone wrote: Just curious - approximately how many HCEs/ non-HCEs do you have? It seems it would be difficult for you to pass nondiscrimination test if you are maxing out after-tax contributions because they should be included in the ACP Test with matching contributions. Do you have NHCEs that also make significant after-tax contributions?
Honestly I doubt there are too many people HCE or otherwise doing after tax-contribs as I have explained the process to a number of folks and mostly got blank stares. Without revealing my employer it is a large employer but it is somewhat unique legally and I suspect that might have something to do with it. But in the 76 page plan document there is not one mention of HCE. Also the spreadsheet they give you for optimizing your contributions makes no mention of HCEs. As I said I don't understand why it works but it does and has for the last 2.5 years I have been doing this.
Being a large company helps as well one or two high contribution rates can be spread across many employees to lower averages. I assumed it was a small business. Thanks
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Re: How do so many HCEs contribute the max to 401k

Post by livesoft »

Eric in DC wrote:So at the end of the day there isn't much risk here. Worst case scenario is I get a check back and pay taxes that I would have paid anyway. Best case, my company passes the test and I keep the money in. Right?
Right. This assumes that your company accountants are competent and will issue you a check in a timely manner.
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Re: How do so many HCEs contribute the max to 401k

Post by ralph124cf »

For those of you who have some input into your company's retirement plans, I would like to point out a REALLY good deal taxwise that can be set up.

At my company, a certain class of employees by contract get a company contribution of 15% of wages deposited to the 401(k). Up to the last two years, if 15% of wage income exceeded the IRS contribution cap, the excess was simply paid out in the next paycheck as wages. Last year, this was changed, and the overage is now deposited pretax into a retiree Health Care Saving Plan (a VEBA), where it can be accessed only after retirement, and only for health care, but still tax free. Note: $1 per hour of wages is withheld as a mandatory contribution to the plan, but no voluntary contributions are allowed. However, many people close to retirement now front-load the $23,000 max employee contribution so that more employer money will exceed the IRS max total contribution and flow into the retiree Health Care Savings Plan.

I should note that this plan also acts as a tontine; that is if an employee or retiree (and all eligibles, such as a spouse or dependent children) dies before exhausting the money in the account, it is credited to all other active accounts.

I don't know if this type of plan would work with an employer MATCH, I think it would have to be an employer contribution.

Good luck.

Ralph
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Re: How do so many HCEs contribute the max to 401k

Post by leonard »

Eric in DC wrote:Hey all-

I might have brought this up in the past, but I repeatedly read, mostly on portfolio check threads, how people with high income contribute 17.5k to their 401k. It seems so common but from everything I've read it seems like a rarity for this to be possible. Is there something I'm missing? My handbook at work states that I have a 3% limit as a HCE but what would happen if I did more? Why can so many people on the forum do this?

Thanks!
Keep in mind that non-HCE employees contribute to the max all the time as well.

And, if you ask "Why" they can do this. It's generally because they live well below their means, they do not increase lifestyle spending as they get raises, and prioritize retirement savings over buying the latest stuff.
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Re: How do so many HCEs contribute the max to 401k

Post by NightOwl »

Eric in DC wrote:Hey all-

I might have brought this up in the past, but I repeatedly read, mostly on portfolio check threads, how people with high income contribute 17.5k to their 401k. It seems so common but from everything I've read it seems like a rarity for this to be possible. Is there something I'm missing? My handbook at work states that I have a 3% limit as a HCE but what would happen if I did more? Why can so many people on the forum do this?

Thanks!
This is really a company policy issue. There are ways to remedy a non-discrimination test failure -- increasing the employer match and/or employing a "safe harbor" plan (which essentially increases the employer match) have already been mentioned. A company can also auto-enroll employees in the 401k and ask them to opt OUT instead of opt IN -- the same people who don't participate due to inertia will now participate due to inertia (I don't understand that behavior, but whatever).

If my participation rate were capped at 3% of my salary, I'd be asking company management (politely at first, then increasingly less politely) why they are pursuing policies (low/no match) that take away from their HCEs a benefit that is widely available from other employers. If my concerns weren't addressed, I'd consider moving laterally to a comparable job that offered better benefits.

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Re: How do so many HCEs contribute the max to 401k

Post by thenextguy »

leonard wrote:
Eric in DC wrote:Hey all-

I might have brought this up in the past, but I repeatedly read, mostly on portfolio check threads, how people with high income contribute 17.5k to their 401k. It seems so common but from everything I've read it seems like a rarity for this to be possible. Is there something I'm missing? My handbook at work states that I have a 3% limit as a HCE but what would happen if I did more? Why can so many people on the forum do this?

Thanks!
Keep in mind that non-HCE employees contribute to the max all the time as well.

And, if you ask "Why" they can do this. It's generally because they live well below their means, they do not increase lifestyle spending as they get raises, and prioritize retirement savings over buying the latest stuff.
He wasn't asking how they do it financially. He was asking about how they do it legally.
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Re: How do so many HCEs contribute the max to 401k

Post by Dutch »

When your company's plan qualifies as a "safe harbor" plan, the whole HCE issue does not apply.

In a Safe Harbor plan, the employer elects before the beginning of each plan year to make one of two types of contributions for the following year:

1. A Non-Elective contribution to all eligible participants:
- a minimum of 3% of pay
- must include pay for the entire plan year regardless of the employee’s entry date in the plan
2. A matching contribution under one of the formulas listed below (a match is allocated only to employees who defer their own pay to the plan)
- Basic Match: 4% of pay for participants who defer at least 5% of their pay. The Basic Match is structured as follows:
* 100% of the first 3% of pay that is contributed; and
* 50% of the next 2% of pay that is contributed
- The Enhanced Match:
* 100% of the first 4% of pay that is contributed to the plan (this is the minimum required under this option)
* 100% of the first 6% of pay is the maximum allowed to still get a pass on the ACP test
Last edited by Dutch on Wed Oct 22, 2014 1:48 pm, edited 1 time in total.
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Re: How do so many HCEs contribute the max to 401k

Post by cherijoh »

Eric in DC wrote:Debating whether or not I should kick it up to 50% for the rest of the year and see what happens. Does anyone have any experience with over contributing as a HCE?
If your company has told you that you are an HCE and that your limit is x% then you don't want to mess with that. Your only recourse is to try and encourage non-HCEs to contribute to the plan, since the % HCEs are allowed to contribute is calculated based on the non-HCE contribution levels. OR try and lobby HR to modify the plan so that it complies with the safe harbor rules.
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Re: How do so many HCEs contribute the max to 401k

Post by nisiprius »

livesoft wrote:
Eric in DC wrote:So at the end of the day there isn't much risk here. Worst case scenario is I get a check back and pay taxes that I would have paid anyway. Best case, my company passes the test and I keep the money in. Right?
Right. This assumes that your company accountants are competent and will issue you a check in a timely manner.
You absolutely need to find out why they are telling you not to contribute more than 3%.

Also, livesoft's description of the time course matches my recollections, so I'll mention this... if you do your own taxes there can be a meaningful nuisance factor because it takes two years for the dust to settle. You overcontribute in year X, then you get the check in year X + 1, and then you do your taxes in year X + 2. And the form is one I'd never seen before used for a whole bunch of different purposes, so it comes with about 40 pages of instructions, and it takes a while to find out which page is telling you how to use it to report refunds of excess contributions to a 401(k).
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Re: How do so many HCEs contribute the max to 401k

Post by knr143 »

This is a great thread with lof of info, thx!

I have a slightly different question - As an HCE, if I over contribute and the company needs to return certain amount, I suspect they *force* a sale of my mutual funds to generate that refund. If my mutual funds have *lost* value since I bought them, does that mean I take that loss, and in addition, pay tax on the amount being refunded ? If so, that is a double whammy :oops:

Edit: If that is indeed the case, is the loss i take still deductible as a capital loss ?
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Re: How do so many HCEs contribute the max to 401k

Post by ERISA Stone »

knr143 wrote:This is a great thread with lof of info, thx!

I have a slightly different question - As an HCE, if I over contribute and the company needs to return certain amount, I suspect they *force* a sale of my mutual funds to generate that refund. If my mutual funds have *lost* value since I bought them, does that mean I take that loss, and in addition, pay tax on the amount being refunded ? If so, that is a double whammy :oops:

Edit: If that is indeed the case, is the loss i take still deductible as a capital loss ?
It's not a capital loss. It's income that you were able to defer paying taxes on for a year. When the excess is calculated, it factors in the earnings on the excess.

If your plan document says HCEs can only contribute a maximum of 3%, then that's all you can contribute. Your HR or payroll company should have something set up in the system to flag your account as they know who the HCEs are at the beginning of the year. I'm curious if it's actually in your plan document or if they are simply creating an administrative procedure. If that was the case, if I felt comfortable ruffling feathers at my job, I would cause a small stink. If the document doesn't mention the 3% cap, you should be able to contribute whatever the document says the maximum is. Otherwise, the plan is not being operated according to the plan document.

If you're wondering why employers don't just let the refunds play out at the end of the year, I generally run across two reasons:

1. Excess contribution refunds cost $$ to calculate. If you're a large plan, I could see that getting somewhere between $750-$1000.
2. When there are excess refunds, a test failed. Some employers balk at the word "fail". It makes them nervous that they are increasing their audit risk.
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Re: How do so many HCEs contribute the max to 401k

Post by munemaker »

livesoft wrote:
Eric in DC wrote:So at the end of the day there isn't much risk here. Worst case scenario is I get a check back and pay taxes that I would have paid anyway. Best case, my company passes the test and I keep the money in. Right?
Right. This assumes that your company accountants are competent and will issue you a check in a timely manner.
There is also a risk of market movement between the time the money is put in and withdrawn. Say the market drops just before the plan admin cashes you out for whatever amount is necessary, you could suffer a capital loss on the round trip. Capital losses inside a 401K are not deductible. Of course, the opposite could happen and you may have a gain.
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Re: How do so many HCEs contribute the max to 401k

Post by leonard »

thenextguy wrote:
leonard wrote:
Eric in DC wrote:Hey all-

I might have brought this up in the past, but I repeatedly read, mostly on portfolio check threads, how people with high income contribute 17.5k to their 401k. It seems so common but from everything I've read it seems like a rarity for this to be possible. Is there something I'm missing? My handbook at work states that I have a 3% limit as a HCE but what would happen if I did more? Why can so many people on the forum do this?

Thanks!
Keep in mind that non-HCE employees contribute to the max all the time as well.

And, if you ask "Why" they can do this. It's generally because they live well below their means, they do not increase lifestyle spending as they get raises, and prioritize retirement savings over buying the latest stuff.
He wasn't asking how they do it financially. He was asking about how they do it legally.
Right. Well, generally, their employers have the good sense to make the 401k a Safe Harbor plan. Pretty straightforward.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: How do so many HCEs contribute the max to 401k

Post by Spirit Rider »

leonard wrote:Right. Well, generally, their employers have the good sense to make the 401k a Safe Harbor plan. Pretty straightforward.
Many companies do not have safe harbor plans for one and/or two primary reasons.

1. They do not wish to do a match as high as the safe harbor requirements.
2. Safe harbor plans require immediate vesting and they want vesting schedules.

Most of these companies will do contribution percentage limitations instead of waiting to do corrective action by March 15th of the following year. The company is the one with significant compliance risk and costs.

Still a 3% HCE contribution limit means that the non-HCEs have a 1% contribution rate. The company should do something (education, automatic enrollment, etc..) to boost non-HCE participation..

I too would consider other employment if I was limited to a 3% contribution rate.
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Re: How do so many HCEs contribute the max to 401k

Post by leonard »

Spirit Rider wrote:
leonard wrote:Right. Well, generally, their employers have the good sense to make the 401k a Safe Harbor plan. Pretty straightforward.
Many companies do not have safe harbor plans for one and/or two primary reasons.

1. They do not wish to do a match as high as the safe harbor requirements.
2. Safe harbor plans require immediate vesting and they want vesting schedules.

Most of these companies will do contribution percentage limitations instead of waiting to do corrective action by March 15th of the following year. The company is the one with significant compliance risk and costs.

Still a 3% HCE contribution limit means that the non-HCEs have a 1% contribution rate. The company should do something (education, automatic enrollment, etc..) to boost non-HCE participation..

I too would consider other employment if I was limited to a 3% contribution rate.
I disagree. I think:

1. They fail to build the match in to their overall compensation model, such that it is planned for as part of overall compensation.
2. They incur the administrative overhead of administering vesting schedules, instead of keeping it simple.

Companies find false economies with match restrictions and vesting schedules. Such plans are much more personal and time intensive and therefore more expensive. IN addition, such plans incur the complexity of cost the testing to see if HCE have over contributed.

The alternative: build the match in to the overall comp model, vest immediately, and have a safe harbor 401k. This also avoids the high cost and complexity of personelle to administer the complexities of vesting and testing for HCE's. It's a win-win.

So as I said, "generally, their employers have the good sense to make the 401k a Safe Harbor plan. Pretty straightforward."
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Re: How do so many HCEs contribute the max to 401k

Post by Spirit Rider »

leonard wrote:I disagree. I think:

1. They fail to build the match in to their overall compensation model, such that it is planned for as part of overall compensation.
2. They incur the administrative overhead of administering vesting schedules, instead of keeping it simple.

Companies find false economies with match restrictions and vesting schedules. Such plans are much more personal and time intensive and therefore more expensive. IN addition, such plans incur the complexity of cost the testing to see if HCE have over contributed.

The alternative: build the match in to the overall comp model, vest immediately, and have a safe harbor 401k. This also avoids the high cost and complexity of personal to administer the complexities of vesting and testing for HCE's. It's a win-win.

So as I said, "generally, their employers have the good sense to make the 401k a Safe Harbor plan. Pretty straightforward."
Actually, I don't disagree with what you are saying company's should do. I'm just saying what they think.

I worked for a company that provided a company match sufficient to be a safe harbor plan. Yet they intentionally have a five year vesting schedule preventing the safe harbor. That tells me they view their 401k as a company retention tool rather than a benefit for their employees.
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Re: How do so many HCEs contribute the max to 401k

Post by ERISA Stone »

Spirit Rider wrote:
leonard wrote:I disagree. I think:

1. They fail to build the match in to their overall compensation model, such that it is planned for as part of overall compensation.
2. They incur the administrative overhead of administering vesting schedules, instead of keeping it simple.

Companies find false economies with match restrictions and vesting schedules. Such plans are much more personal and time intensive and therefore more expensive. IN addition, such plans incur the complexity of cost the testing to see if HCE have over contributed.

The alternative: build the match in to the overall comp model, vest immediately, and have a safe harbor 401k. This also avoids the high cost and complexity of personal to administer the complexities of vesting and testing for HCE's. It's a win-win.

So as I said, "generally, their employers have the good sense to make the 401k a Safe Harbor plan. Pretty straightforward."
Actually, I don't disagree with what you are saying company's should do. I'm just saying what they think.

I worked for a company that provided a company match sufficient to be a safe harbor plan. Yet they intentionally have a five year vesting schedule preventing the safe harbor. That tells me they view their 401k as a company retention tool rather than a benefit for their employees.
Personally, I wouldn't recommend a company provide a SH contribution unless they were having trouble with the ADP/ACP Test, top heavy, or used new comparability formulas to max out the owner's contribution. In my experience, most TPAs charge a set cost for testing and don't discount just because they don't perform the ADP/ACP test (unless it fails. Then there's usually a charge to calculate refunds). I don't see anything wrong with rewarding longevity by implementing vesting schedules.

I would put a 3rd reason down for reasons SH plans aren't offered: some employers don't want to lock themselves into a contribution a year in advance with the possibility that something could happen that would leave them unable to fund a required contribution.
leonard
Posts: 5993
Joined: Wed Feb 21, 2007 10:56 am

Re: How do so many HCEs contribute the max to 401k

Post by leonard »

ERISA Stone wrote:
Spirit Rider wrote:
leonard wrote:I disagree. I think:

1. They fail to build the match in to their overall compensation model, such that it is planned for as part of overall compensation.
2. They incur the administrative overhead of administering vesting schedules, instead of keeping it simple.

Companies find false economies with match restrictions and vesting schedules. Such plans are much more personal and time intensive and therefore more expensive. IN addition, such plans incur the complexity of cost the testing to see if HCE have over contributed.

The alternative: build the match in to the overall comp model, vest immediately, and have a safe harbor 401k. This also avoids the high cost and complexity of personal to administer the complexities of vesting and testing for HCE's. It's a win-win.

So as I said, "generally, their employers have the good sense to make the 401k a Safe Harbor plan. Pretty straightforward."
Actually, I don't disagree with what you are saying company's should do. I'm just saying what they think.

I worked for a company that provided a company match sufficient to be a safe harbor plan. Yet they intentionally have a five year vesting schedule preventing the safe harbor. That tells me they view their 401k as a company retention tool rather than a benefit for their employees.
Personally, I wouldn't recommend a company provide a SH contribution unless they were having trouble with the ADP/ACP Test, top heavy, or used new comparability formulas to max out the owner's contribution. In my experience, most TPAs charge a set cost for testing and don't discount just because they don't perform the ADP/ACP test (unless it fails. Then there's usually a charge to calculate refunds). I don't see anything wrong with rewarding longevity by implementing vesting schedules.

I would put a 3rd reason down for reasons SH plans aren't offered: some employers don't want to lock themselves into a contribution a year in advance with the possibility that something could happen that would leave them unable to fund a required contribution.
Complexity is expensive in terms of errors and in terms of people auditing to make sure it is right. Vesting schedules add complexity. ADP/acp testing adds complexity. Save the man hours, build SH matching in to overall compensation, reduce complexity, and save worker and Sr Management man hours spent on the 401k.

btw - you can more easily reward longevity with stock, equity, or a bonus awarded over time outside of the 401k. That meets the longevity reward goal but keeps the complexity out of the 401k.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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