From IRS Publication 560:
What does "preceding year" mean?Highly compensated employee. A highly compensated employee is an individual who: ... For the preceding year, received compensation from you of more than $110,000 (if the preceding year is 2011, $115,000 if the preceding year is 2012 or 2013) and, if you so choose, was in the top 20% of employees when ranked by compensation.
This resource, and several others, indicate one interpretation:
http://www.abgil.com/employee_benefits_plansNote: A person hired during a plan year who is not an owner cannot be an HCE for their first year of employment because they did not make more than $115,000 in the prior year. For example, suppose you hire someone on 1/5/2013 and pay them $400,000 for 2013, but they are not a greater than 5% shareholder. That person would still NOT be in the HCE group for 2013.
Essentially, that reference seems to imply that, no matter what, that first year your salary goes over the limit your contributions are safe and won't be taxed. My own read of the publication made me think that the "preceding year" thing was simply referring to the fact that in April 2014 you pay taxes for 2013.
As you can probably surmise, someone very close to me is going over the limit for the first time in 2013. Is there some definitive reference that says that that person would or would not be HCE for tax year 2013?
Also is HCE really a step function: A $1 raise, from $114,999 to $115,000 results in, effectively, loss of a $23,500 (minus 2% over the non-HCE average contribution percentage) tax shelter? Or is there some relationship between how far over the limit you are and how much of the tax shelter you lose? (I see no indication of the latter.
Finally, given that HCEs by their very nature cannot contribute to IRAs since they are "eligible" for 401ks and make "too much", are there no comparable tax shelters for wage income available? (I don't see any, myself.)