401k - Highly Compensated Employee?

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VoiceOfReason
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401k - Highly Compensated Employee?

Post by VoiceOfReason » Mon Feb 01, 2016 7:57 pm

I recently received a letter from my employer that said the IRS classifies me as a "highly compensated employee" with a salary over 120k and therefore my contributions to the 401k plan has been capped at 10% pretax and 8% after tax.

Has anyone run into this? Someone making between 120-180k would have a 401k contribution limit lower than 18k. This makes absolutely no sense why this would happen.

any recommendations to get around this situation?

Haven't called HR yet...

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Phineas J. Whoopee
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Re: 401k - Highly Compensated Employee?

Post by Phineas J. Whoopee » Mon Feb 01, 2016 8:03 pm

Like it or not, it's so the most highly-paid employees don't also reap the biggest advantages. Congress set it up that way.

You could, I suppose, ask for a pay cut. :happy

More seriously, you could engage politically, trying to get the law changed.

PJW
Last edited by Phineas J. Whoopee on Mon Feb 01, 2016 8:11 pm, edited 1 time in total.

livesoft
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Re: 401k - Highly Compensated Employee?

Post by livesoft » Mon Feb 01, 2016 8:07 pm

Yes. The way to get around this is to have your employer create a safe-harbor 401(k) plan and contribute more of the employer's money to ALL employee's 401(k) accounts.
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marekc
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Re: 401k - Highly Compensated Employee?

Post by marekc » Mon Feb 01, 2016 8:16 pm

yes, I ran into this. The limits are 25% (including company match) or $52K whichever is lower. The highly compensated run into other limits, but HC are $250k+.

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prudent
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Re: 401k - Highly Compensated Employee?

Post by prudent » Mon Feb 01, 2016 8:41 pm

At my company, HCEs cannot contribute the max but they can contribute more than 10% pretax that the OP is limited to. The cutoff is determined by a comparison of HCE contributions and non-HCE contributions - if non-HCEs contribute more %, then HCEs will be able to as well. It's an IRS rule for non-discrimination.

If a safe harbor plan isn't in the cards, perhaps they can explore ways to get non-HCEs to up their contributions, which is probably a good idea in any case.

Spirit Rider
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Re: 401k - Highly Compensated Employee?

Post by Spirit Rider » Mon Feb 01, 2016 9:01 pm

There is no way "to get around this situation" by calling HR. These are provisions of the Internal Revenue Code enacted by congress and enforced by IRS regulations. This is intended to prevent business owners, management and highly paid professionals from getting greater retirement benefits that lower income participants.

What is being limited is your ability to get greater tax benefits in tax advantaged accounts. Nothing is preventing you from investing in taxable accounts. Tax benefits are routinely limited based on public policy concerns.

The real problem is that your company is too cheap to provide the minimal company contributions necessary to meet the safe harbor requirements. As has been stated a safe harbor plan has no limits on employee salary deferrals beyond the maximum contribution limit. Note: Even with a safe harbor plan you may still have after-tax limits.

It has happened to me several times over my career. I have been limited to as little as 3% - 5%. The chance that you can get your company to not be so cheap and adopt a safe harbor plan is probably slim to none. Best to just deal with it and make taxable investments to meet your savings goals.

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Re: 401k - Highly Compensated Employee?

Post by jlawrence01 » Mon Feb 01, 2016 9:08 pm

VoiceOfReason wrote:I recently received a letter from my employer that said the IRS classifies me as a "highly compensated employee" with a salary over 120k and therefore my contributions to the 401k plan has been capped at 10% pretax and 8% after tax.

Has anyone run into this? Someone making between 120-180k would have a 401k contribution limit lower than 18k. This makes absolutely no sense why this would happen.

any recommendations to get around this situation?

Haven't called HR yet...

1) At least it is capped at 10% pretax. I have seen it capped as low as 5% in certain companies.

2) There is an easy way to get around this. the employer can contribute 3% safe harbor which eliminates the non-discrimination testing completely. Also, HR and the company management can work to increase participation among the non-participants through employee education.

3) There is no way to get around it.

As I used to tell people who came to me complaining, be happy that you are an HCE as your salary is significantly higher than those who are not.

Texas hold em71
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Re: 401k - Highly Compensated Employee?

Post by Texas hold em71 » Mon Feb 01, 2016 9:14 pm

Congrats. You have arrived. You are what the rest of the world considers rich.

Read about back door Roth's

Open a taxable account. Now you'll understand all those TLH threads.

Come back in a few years when you find out the employer can only match your contribution on a certain amount of income. I think it's 250K now?

wingz
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Re: 401k - Highly Compensated Employee?

Post by wingz » Mon Feb 01, 2016 9:17 pm

My base pay is less than you and i dont have access to 401k because i am considered HCE; i get dc plan though where i can put 100% base pay and allows in service withdrawls.

Atilla
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Re: 401k - Highly Compensated Employee?

Post by Atilla » Mon Feb 01, 2016 9:19 pm

You're getting off easy. For a couple years I was limited to 3.5%. And the backdoor Roth wasn't available at the time. Bastards.
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wassabi
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Re: 401k - Highly Compensated Employee?

Post by wassabi » Mon Feb 01, 2016 9:24 pm

News to me. I make 140k and contribute maximum 18k every year with no match. Never heard of highly compensated employee at our salary.

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Re: 401k - Highly Compensated Employee?

Post by Spirit Rider » Mon Feb 01, 2016 10:21 pm

wassabi wrote:News to me. I make 140k and contribute maximum 18k every year with no match. Never heard of highly compensated employee at our salary.
Doesn't mean they don't exist. I can think of some possible reasons:
  1. You don't have a match, but maybe you have a 3%+ non-elective employer contribution to qualify as a safe harbor plan.
  2. 2015 was your first year at this company and you haven't been notified yet. The company has until 3/15 to correct and report testing failures.
  3. Your plan has HCEs who don't contribute much and/or non-HCEs who do, which allows your plan to pass anti-discrimination testing.
  4. Your plan is poorly run and fails to do testing and is a ticking time bomb.
P.S. tomales might be on to the most likely reason. Your company has elected to use the employees representing the top 20% of compensation.
Last edited by Spirit Rider on Tue Feb 02, 2016 12:38 am, edited 2 times in total.

Tamales
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Re: 401k - Highly Compensated Employee?

Post by Tamales » Mon Feb 01, 2016 11:06 pm

I forget the official name for it, but companies can declare a higher amount as the HCE threshold. For example the company I work for, the threshold for HCE was ~$160k a couple years ago, and I presume it gets bumped up maybe annually. So I guess you can call the IRS amount the default unless the company files for a higher amount.

edit: it's called the top paid group election.

wassabi
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Re: 401k - Highly Compensated Employee?

Post by wassabi » Tue Feb 02, 2016 5:18 am

Spirit Rider wrote:
wassabi wrote:News to me. I make 140k and contribute maximum 18k every year with no match. Never heard of highly compensated employee at our salary.
Doesn't mean they don't exist. I can think of some possible reasons:
  1. You don't have a match, but maybe you have a 3%+ non-elective employer contribution to qualify as a safe harbor plan.
  2. 2015 was your first year at this company and you haven't been notified yet. The company has until 3/15 to correct and report testing failures.
  3. Your plan has HCEs who don't contribute much and/or non-HCEs who do, which allows your plan to pass anti-discrimination testing.
  4. Your plan is poorly run and fails to do testing and is a ticking time bomb.
P.S. tomales might be on to the most likely reason. Your company has elected to use the employees representing the top 20% of compensation.

#1 it is! We have a safe harbor plan. Good catch!

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Re: 401k - Highly Compensated Employee?

Post by Tamales » Tue Feb 02, 2016 10:24 am

wassabi wrote:
Spirit Rider wrote:
wassabi wrote:News to me. I make 140k and contribute maximum 18k every year with no match. Never heard of highly compensated employee at our salary.
Doesn't mean they don't exist. I can think of some possible reasons:
  1. You don't have a match, but maybe you have a 3%+ non-elective employer contribution to qualify as a safe harbor plan.
  2. 2015 was your first year at this company and you haven't been notified yet. The company has until 3/15 to correct and report testing failures.
  3. Your plan has HCEs who don't contribute much and/or non-HCEs who do, which allows your plan to pass anti-discrimination testing.
  4. Your plan is poorly run and fails to do testing and is a ticking time bomb.
P.S. tomales might be on to the most likely reason. Your company has elected to use the employees representing the top 20% of compensation.

#1 it is! We have a safe harbor plan. Good catch!
You may also have the top paid group election on top of that non-elective contribution. Search for "highly" in your latest plan document (I think it has to be disclosed there).
I'm not sure what counts toward compensation for that elective HCE threshold; maybe someone here knows?
Is it strictly base salary before any taxes or pre-tax deductions, or does it include RSUs, NQOs, bonuses in various forms, profit sharing, elective or non-elective employer contributions to retirement, etc.

wolf359
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Re: 401k - Highly Compensated Employee?

Post by wolf359 » Tue Feb 02, 2016 10:45 am

If you're in a small company, you have the ability to influence matters. Find out from HR what test they're failing (percent participation, amounts of contribution, HCE/LCE ratio, etc.) Then encourage your fellow employees to contribute, targeting those people that will enable the company to pass the test. If the employer is offering a match, sell the fact that your co-workers are leaving free money on the table. With a small company, sometimes only a couple of additional people participating will make all the difference. Usually, it's the secretaries, janitors, and other low-paid personnel who make all the difference (getting higher participation from other HCEs may hurt rather than help the ratios.)

Make suggestions to HR (and the CEO, if you have that relationship) about how they could get past the means testing. Automatic participation with an opt-out is one. Setting up a safe harbor plan is another. The CEO is probably interested because s/he's probably one of the HCEs who is blocked from contributing, and s/he has to approve changes.

ERISA Stone
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Re: 401k - Highly Compensated Employee?

Post by ERISA Stone » Tue Feb 02, 2016 11:43 am

Tamales wrote:I forget the official name for it, but companies can declare a higher amount as the HCE threshold. For example the company I work for, the threshold for HCE was ~$160k a couple years ago, and I presume it gets bumped up maybe annually. So I guess you can call the IRS amount the default unless the company files for a higher amount.

edit: it's called the top paid group election.
This doesn't mean you can elect a higher compensation threshold. It means if you have enough employees over the HCE threshold, you can limit the HCE group to the top 20% compensated employees in the company.

If less than 20% of employees are below the threshold, the election isn't relevant.

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Re: 401k - Highly Compensated Employee?

Post by ubermax » Tue Feb 02, 2016 11:44 am

K plans have their own non-discrimination testing rules to make sure that HCEs aren't socking away an unreasonable (determined by IRS) amount as compared to their unfortunate colleagues the NHCEs ; an employer can chose between current year or prior year testing .

With current year testing the employer won't know the results of the tests until year-end and if they fail then dollars are distributed back to the HCEs which doesn't go over well ; with prior year testing the test results from last year are used to limit what the HCEs are putting in so that the tests are more likely to be passed without having to return money .

OP since you're getting the letter early in the new year , I suspect they're using prior year testing .

Others have mentioned the safe-harbor K plan ; that'll work too but chances are your employer wants to stretch the allocation as far as they can for the benefit of the chosen ones :happy
Last edited by ubermax on Tue Feb 02, 2016 12:01 pm, edited 2 times in total.

Tamales
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Re: 401k - Highly Compensated Employee?

Post by Tamales » Tue Feb 02, 2016 11:53 am

ERISA Stone wrote:
Tamales wrote:I forget the official name for it, but companies can declare a higher amount as the HCE threshold. For example the company I work for, the threshold for HCE was ~$160k a couple years ago, and I presume it gets bumped up maybe annually. So I guess you can call the IRS amount the default unless the company files for a higher amount.

edit: it's called the top paid group election.
This doesn't mean you can elect a higher compensation threshold. It means if you have enough employees over the HCE threshold, you can limit the HCE group to the top 20% compensated employees in the company.

If less than 20% of employees are below the threshold, the election isn't relevant.
Thanks for the details on the process for the election, and I didn't mean to imply they could just randomly pick a higher number (but on re-reading what I wrote, that's probably how it sounded).

Do you happen to know what gets counted as compensation besides base salary?

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Re: 401k - Highly Compensated Employee?

Post by ERISA Stone » Tue Feb 02, 2016 12:17 pm

Tamales wrote:
ERISA Stone wrote:
Tamales wrote:I forget the official name for it, but companies can declare a higher amount as the HCE threshold. For example the company I work for, the threshold for HCE was ~$160k a couple years ago, and I presume it gets bumped up maybe annually. So I guess you can call the IRS amount the default unless the company files for a higher amount.

edit: it's called the top paid group election.
This doesn't mean you can elect a higher compensation threshold. It means if you have enough employees over the HCE threshold, you can limit the HCE group to the top 20% compensated employees in the company.

If less than 20% of employees are below the threshold, the election isn't relevant.
Thanks for the details on the process for the election, and I didn't mean to imply they could just randomly pick a higher number (but on re-reading what I wrote, that's probably how it sounded).

Do you happen to know what gets counted as compensation besides base salary?
I would have to go back and look but it's either 414 or 415 compensation. For most employees this is the number in box 5 of the w-2. That's only for the HCE determination. There can be different definitions of compensation of other facets of the plan.

HCE determination is based on prior plan year so you would look at 2015 compensation for the 2016 determination.

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Re: 401k - Highly Compensated Employee?

Post by ubermax » Tue Feb 02, 2016 1:37 pm

ERISA Stone wrote:I would have to go back and look but it's either 414 or 415 compensation. For most employees this is the number in box 5 of the w-2. That's only for the HCE determination. There can be different definitions of compensation of other facets of the plan.

HCE determination is based on prior plan year so you would look at 2015 compensation for the 2016 determination.

HCE defined in 414(q) with "compensation" per 415(c)(3)

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Re: 401k - Highly Compensated Employee?

Post by ERISA Stone » Tue Feb 02, 2016 3:55 pm

ubermax wrote:
ERISA Stone wrote:I would have to go back and look but it's either 414 or 415 compensation. For most employees this is the number in box 5 of the w-2. That's only for the HCE determination. There can be different definitions of compensation of other facets of the plan.

HCE determination is based on prior plan year so you would look at 2015 compensation for the 2016 determination.

HCE defined in 414(q) with "compensation" per 415(c)(3)
I'm not sure if that makes me right or not. :-)

If you care to be bored to death, this link is probably the best resource I have been able to find on compensation. It has answered a lot of questions over the years.

https://www.irs.gov/pub/irs-tege/epchd304.pdf

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Re: 401k - Highly Compensated Employee?

Post by jlawrence01 » Tue Feb 02, 2016 4:55 pm

wolf359 wrote:If you're in a small company, you have the ability to influence matters. Find out from HR what test they're failing (percent participation, amounts of contribution, HCE/LCE ratio, etc.) Then encourage your fellow employees to contribute, targeting those people that will enable the company to pass the test. If the employer is offering a match, sell the fact that your co-workers are leaving free money on the table. With a small company, sometimes only a couple of additional people participating will make all the difference. Usually, it's the secretaries, janitors, and other low-paid personnel who make all the difference (getting higher participation from other HCEs may hurt rather than help the ratios.)

If you are in a smaller company, most of the upper and middle management are generally VERY aware of the HCE and non-discrimination testing and MOST will change their plan to include a safe harbor provision.

Where you encounter problems is when management offers a significant profit sharing plan in addition to a 401(k) and does not want to reduce a performance based program to fund the safe harbor. You also run into issues where the hourly people in a union shop are covered by a defined benefit program and refuse to participate in 401(k) programs.

Further complicating this is when the entity is a subsidiary/division of a larger corporation. Is the discrimination testing done on a division basis or a corporate basis? From past experience, this can yield very different results.

For the record, I have NOT been involved in these compensation issues in 7-8 years and possibly, some of this has changed. However, I would say that this can get very complicated very quickly.

Do realize that to the best of my knowledge, the "catch-up" provisions for workers OVER 50 are NOT affected by the non-discrimination testing.

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Re: 401k - Highly Compensated Employee?

Post by ubermax » Tue Feb 02, 2016 4:59 pm

ERISA Stone wrote:I'm not sure if that makes me right or not. :-)

If you care to be bored to death, this link is probably the best resource I have been able to find on compensation. It has answered a lot of questions over the years.

https://www.irs.gov/pub/irs-tege/epchd304.pdf
The OP was concerned about his contributions being capped and I believe I offered a legitimate reason - then these threads evolved into a discussion about compensation and Tamales seemed to be asking what is included in compensation.

I took this to mean in the context of a HCE since the OP is one ; the Internal Revenue Code(IRC) Section that discusses HCE is 414(q) and within this Section 415(c) is pointed to for the items included in compensation .

Also Code Section 401(k) itself points to 414(q) for HCE information which points to 415(c) as noted above - ERISA man your link is fine and I don't believe it's a question of you being right or wrong , I just prefer to analyze questions about qualified plans via the IRC where possible , my training perhaps :sharebeer

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Re: 401k - Highly Compensated Employee?

Post by an_asker » Tue Feb 02, 2016 5:07 pm

Spirit Rider wrote:[...]The real problem is that your company is too cheap to provide the minimal company contributions necessary to meet the safe harbor requirements. As has been stated a safe harbor plan has no limits on employee salary deferrals beyond the maximum contribution limit. Note: Even with a safe harbor plan you may still have after-tax limits.
[...]
I would rather make $120K and work for a "cheap" employer than make a five-figure salary and have a safe harbor plan :oops:

Just saying ... the latter is probably in the small minority on this forum.

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Re: 401k - Highly Compensated Employee?

Post by jlawrence01 » Tue Feb 02, 2016 5:08 pm

deleted, duplicate post

fh2000
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Re: 401k - Highly Compensated Employee?

Post by fh2000 » Tue Feb 02, 2016 7:57 pm

This happened to my wife. When she was in accounting department, she was deemed highly compensated, and caped her 401K percentage. After she transferred to IT, she received pay raise, and was also removed her highly compensated status, and has been able to contribute the full amount.

It appears that the highly compensated status has something to do with the total average salary of the group you are in. Since the average salary of IT is higher, she is no longer highly paid, and no longer deemed highly compensated status.

I would suggest that OP look into transfer within the same company, if possible.

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munemaker
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Re: 401k - Highly Compensated Employee?

Post by munemaker » Tue Feb 02, 2016 8:05 pm

fh2000 wrote:
It appears that the highly compensated status has something to do with the total average salary of the group you are in.
Highly compensated limit is defined by the gov't. See, for example, http://www.401khelpcenter.com/2016_401k ... rFR4FUrKVM
or just google 401k highly compensated and you will find the limits expressed many places.

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