How is “salary” calculated for HCE?

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ForeverMom
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Joined: Fri Mar 09, 2018 10:41 pm

How is “salary” calculated for HCE?

Post by ForeverMom » Fri Mar 09, 2018 11:27 pm

I have been reading this forum for several months in preparation for helping my son invest. It has been very helpful. So thank you to all those who ask and answer questions. Now I have a question about my husband’s situation. I am not employed but I do the day-to-day financial “figuring” and planning for the family.

I just found out about potential limitations to 401k contributions for highly compensated employees. The plan is to contribute a high percentage to the company 401k even though there is no match. (”We” haven’t actually started—we were planning to sign up this weekend now that we’ve pre-calculated our tax situation for 2018.) This is the first year with an available 401k in many years.

DH, I believe, is in the top 20% of earners in the small company. He makes just over the IRS income threshold, too, by using his gross salary figure. Is that the amount used? Or, would pre-tax benefits be excluded in what is considered his “salary”?

I need to contact some in HR or their PEO to see if this might be a concern. But it’s Friday night...

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: How is “salary” calculated for HCE?

Post by Spirit Rider » Sat Mar 10, 2018 9:49 pm

There is usually a definition of compensation for the plan. It is gross income and what would be reported on W-2 Box 1 plus all deferrals and all Section 125 deductions added back in.

GAAP
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Re: How is “salary” calculated for HCE?

Post by GAAP » Tue Mar 13, 2018 2:31 pm

My employer notifies affected people -- I believe, but am not certain, that the notification is actually legally required.

soccerrules
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Re: How is “salary” calculated for HCE?

Post by soccerrules » Tue Mar 13, 2018 3:32 pm

I was my understanding that even though you/your spouse might be in the "top 20%" of earners, that does not automatically mean they would be limited to 401K contributions as an HCE.
I was under the impression that there is a formula based on the # of employees that participate in the 401K and their income levels for each year. The intent of the "HCE rule" is that the HCE's should not have a decided advantage (based on income) to contribute to a 401K over the less compensated employees. Maybe someone knows if this is a look back or current year.

I do know at a former employer I was told based on my income during 1st year of employment (based on the participating level in prior years) that I would be marked as an HCE. I was allowed to contribute the max in my first year and then was deemed HCE and not allowed to contribute the following year.

This would be a plug to encourage as many employees at all income levels to participate. I was told PARTICIPATION is what determines if/how it might limit an HCE in contributions with a ceiling.

In the past I have had 401K contributions returned to me at the end of the year because of the testing of the plan (year to year). It has only happened a few (2-3) times in the last 25 years
Don't let your outflow exceed your income or your upkeep will be your downfall.

Spirit Rider
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Re: How is “salary” calculated for HCE?

Post by Spirit Rider » Tue Mar 13, 2018 3:47 pm

Whether HCEs are determined by the statutory limit (2018 = $120K) or in the top 20% by compensation? Is a plan election. The plan should be able to tell you which the plan uses.

They should also be able to tell you if you will likely be an HCE, did the plan fail testing, and if so what the results were.

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goingup
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Re: How is “salary” calculated for HCE?

Post by goingup » Tue Mar 13, 2018 4:11 pm

I wouldn't be dissuaded from signing up. If your husband is an HCE he may have a portion of contributions returned. It's not a big deal.

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Hyperborea
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Re: How is “salary” calculated for HCE?

Post by Hyperborea » Tue Mar 13, 2018 4:13 pm

What is the employer matching like? If it's generous enough then the plan may be in the safe harbour and it doesn't matter if your husband is a HCE.

https://institutional.vanguard.com/iam/pdf/SMSAFE.pdf
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

Spirit Rider
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Re: How is “salary” calculated for HCE?

Post by Spirit Rider » Tue Mar 13, 2018 7:46 pm

Hyperborea wrote:
Tue Mar 13, 2018 4:13 pm
What is the employer matching like? If it's generous enough then the plan may be in the safe harbour and it doesn't matter if your husband is a HCE.
From the OP. "The plan is to contribute a high percentage to the company 401k even though there is no match."

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