Highly Compensated Employee & 401K limits

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hariseldon74
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Highly Compensated Employee & 401K limits

Post by hariseldon74 » Tue Oct 01, 2019 6:43 am

At my company I generally max out my 401K ($19K) and my Roth IRA ($6K), but a few months ago my accounting department asked me to switch my 401K percentage down since last year I hit the the "Highly compensated Employee" limit of $120,000 last year on our 401K and I can only do 2% more than the average employee at my company. 2018 was my first year over $120K. The average employee contribution is dismal at around 3%. I found this rule odd since my company doesn't do much in terms of matching our contributions. They only match 25% of upto 6% of our contributions.

What are my options to try to get the 401K Max of $19,000 in other accounts switching to 5% will make this around $6K into my 401K which is not where I need to be contributing.

I am single so I dont have the option to use other accounts that I'm aware of.

Am I able to switch to Traditional IRA and 401K in the same year along with the Roth IRA

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Re: Highly Compensated Employee & 401K limits

Post by terran » Tue Oct 01, 2019 7:18 am

This is a law, not a policy of your employer, so it's not about limiting your match. I think there are some things they could do to help you (and other HCEs) out by providing a better match to make the plan a "Safe Harbor" plan, but I'm not sure how that works.

The annual limit is combined between traditional and Roth IRA, so you can contribute to both, but your total contribution between the two can't go over the limit. Whether or not you can make a deductible traditional IRA contribution depends on your filing status and income (but you probably make too much): https://www.irs.gov/retirement-plans/20 ... an-at-work

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hariseldon74
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Re: Highly Compensated Employee & 401K limits

Post by hariseldon74 » Tue Oct 01, 2019 7:25 am

Thanks much!!

My adjusted gross income on my tax return was about $71K for 2018 returns year because I pay a significant amount of alimony (family support) mixed with the max of 401K deductions

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Re: Highly Compensated Employee & 401K limits

Post by deikel » Tue Oct 01, 2019 7:32 am

fascinating, I never heard of this before, but it seems a real thing:

https://smartasset.com/retirement/401k- ... d-employee

Lets hope my administration never figures that out....

I guess its an indirect attempt to make sure employers educate their employees to contribute and put some force behind it since they threaten management with lower contributions if they don't and can not get the contribution levels up....odd indeed
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hariseldon74
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Re: Highly Compensated Employee & 401K limits

Post by hariseldon74 » Tue Oct 01, 2019 7:34 am

it's quite significant for those just making $120K. To go from around $19K to $6K pretax is not ideal

Maybe most bigger companies have the safe harbor 401K's, which this isn't required for

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Re: Highly Compensated Employee & 401K limits

Post by Jack FFR1846 » Tue Oct 01, 2019 7:44 am

The simple way to increase what you can contribute is to somehow convince lower paid employees to contribute something to their 401k. I was with a company who gave employees some fixed amount of money if they contributed anything. I was considered a HCE, even being a peon engineer. There were enough factory assemblers making low wages to force limits on pretty much everyone on a salary.

The $120k number isn't something set. Let's say as an example that your company dropped all matching and as a result a large number of low paid employees stopped all 401k contributions. That $120k number might drop to $50k. On the other hand, if the company told all employees that for anyone contributing more than $3%, they would drop $1000 into their account, that might be enough incentive that the number goes up to $200k. I'm just pulling example numbers out of the air.

This isn't something that companies "just find". In order to comply with the law, they have to figure these things out.
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Re: Highly Compensated Employee & 401K limits

Post by hariseldon74 » Tue Oct 01, 2019 7:45 am

Thanks for the info

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Re: Highly Compensated Employee & 401K limits

Post by DVMResident » Tue Oct 01, 2019 8:00 am

My understanding is a HCE can continue to contribute to the limit and, if the company fails the test, they have to refund the excess back to the HCE the following year. But that’s the company’s problem, not the employee’s. I’m not sure what happen with the match.

I might be tempted to decline HR’s request and offer a suggestions to help their participation issue (e.g. automatic enrollment).
Last edited by DVMResident on Tue Oct 01, 2019 8:09 am, edited 1 time in total.

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Re: Highly Compensated Employee & 401K limits

Post by Horton » Tue Oct 01, 2019 8:08 am

Jack FFR1846 wrote:
Tue Oct 01, 2019 7:44 am
The $120k number isn't something set. Let's say as an example that your company dropped all matching and as a result a large number of low paid employees stopped all 401k contributions. That $120k number might drop to $50k. On the other hand, if the company told all employees that for anyone contributing more than $3%, they would drop $1000 into their account, that might be enough incentive that the number goes up to $200k. I'm just pulling example numbers out of the air.

This isn't something that companies "just find". In order to comply with the law, they have to figure these things out.
This isn’t correct. The Highly Compensated Employee Income Limit of $120,000 is set by the IRS annually. Next year the applicable amount will be $125,000.

https://www.standard.com/eforms/10854.pdf

OP - your best option may be to approach your plan administrator or benefits committee and ask them to consider redesigning the plan to meet “safe harbor” requirements:

https://www.thebalance.com/what-is-a-sa ... -k-2894205
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Re: Highly Compensated Employee & 401K limits

Post by MrBobcat » Tue Oct 01, 2019 8:19 am

DVMResident wrote:
Tue Oct 01, 2019 8:00 am
My understanding is a HCE can continue to contribute to the limit and, if the company fails the test, they have to refund the excess back to the HCE the following year. But that’s the company’s problem, not the employee’s. I’m not sure what happen with the match.

I might be tempted to decline HR’s request and offer a suggestions to help their participation issue (e.g. automatic enrollment).
Well the refunded excess is taxable to the employee so it's their problem too.

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Re: Highly Compensated Employee & 401K limits

Post by Spirit Rider » Tue Oct 01, 2019 8:22 am

Jack FFR1846 wrote:
Tue Oct 01, 2019 7:44 am
The $120k number isn't something set. Let's say as an example that your company dropped all matching and as a result a large number of low paid employees stopped all 401k contributions. That $120k number might drop to $50k. On the other hand, if the company told all employees that for anyone contributing more than $3%, they would drop $1000 into their account, that might be enough incentive that the number goes up to $200k. I'm just pulling example numbers out of the air.
This is incorrect.

The statutory* highly compensated employee (HCE) compensation limit is codified in the tax code subject to inflation adjustments. It has nothing to do with the non-HCE (NHCE) average actual deferral percentage (ADP).

The only things that do change are due to ADP testing. The average HCE and NHCE ADPs must meet specified metrics or the testing fails. The 401k plan has the option to either make qualified non elective contributions (QNEC) to NHCEs or reduce HCE contributions to meet the metrics. Which one do you think most plans choose?

*A 401k plan has the option to designate the top 20% of employees by compensation as HCEs instead of the statutory compensation limit. A plan would only choose this option if it resulted in a higher limit.

As has been mentioned. A safe harbor 401k plan does not require ADP testing.

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Re: Highly Compensated Employee & 401K limits

Post by jyoung » Tue Oct 01, 2019 8:27 am

This is not what I use it for, but I *think* this may be one of the reasons for my company's 401k after tax contribution option. My understanding is you could contribute after tax up to the limit and then roll into the Roth 401k once a year (plan limit), similar to how I do once I hit the $19k limit. Others would probably know more, and your plan may not offer after tax contributions, but that might be an option?

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Re: Highly Compensated Employee & 401K limits

Post by cherijoh » Tue Oct 01, 2019 8:33 am

hariseldon74 wrote:
Tue Oct 01, 2019 6:43 am
At my company I generally max out my 401K ($19K) and my Roth IRA ($6K), but a few months ago my accounting department asked me to switch my 401K percentage down since last year I hit the the "Highly compensated Employee" limit of $120,000 last year on our 401K and I can only do 2% more than the average employee at my company. 2018 was my first year over $120K. The average employee contribution is dismal at around 3%. I found this rule odd since my company doesn't do much in terms of matching our contributions. They only match 25% of upto 6% of our contributions.

What are my options to try to get the 401K Max of $19,000 in other accounts switching to 5% will make this around $6K into my 401K which is not where I need to be contributing.

I am single so I dont have the option to use other accounts that I'm aware of.

Am I able to switch to Traditional IRA and 401K in the same year along with the Roth IRA
There is not much that you can do other than encourage your company to change the plan and make it a safe harbor plan (or find a new job). But that would require them to pony up more money to encourage participation - either a much better match or a direct employer contribution to the 401k for all employees regardless of their partiticaption in the plan (providing they were eligible to participate). It is actually their stingy matching that results in the low participation rate that is limiting your max contribution rate. If they matched at even 50%, I bet the average participation rate would jump up close to 6%.

No, you don't get to put $6K into each if you have both a Roth and Traditional - its $6K combined. And because you have a retirement plan your ability to deduct a traditional IRA may be limited.

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Re: Highly Compensated Employee & 401K limits

Post by hariseldon74 » Tue Oct 01, 2019 8:35 am

Wow this is my first question on bogleheads, but this is best site I have seen in terms of the quality of the responses and the kindness of strangers. Thanks everyone what a wonderful site and kind people

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Re: Highly Compensated Employee & 401K limits

Post by smitcat » Tue Oct 01, 2019 8:47 am

cherijoh wrote:
Tue Oct 01, 2019 8:33 am
hariseldon74 wrote:
Tue Oct 01, 2019 6:43 am
At my company I generally max out my 401K ($19K) and my Roth IRA ($6K), but a few months ago my accounting department asked me to switch my 401K percentage down since last year I hit the the "Highly compensated Employee" limit of $120,000 last year on our 401K and I can only do 2% more than the average employee at my company. 2018 was my first year over $120K. The average employee contribution is dismal at around 3%. I found this rule odd since my company doesn't do much in terms of matching our contributions. They only match 25% of upto 6% of our contributions.

What are my options to try to get the 401K Max of $19,000 in other accounts switching to 5% will make this around $6K into my 401K which is not where I need to be contributing.

I am single so I dont have the option to use other accounts that I'm aware of.

Am I able to switch to Traditional IRA and 401K in the same year along with the Roth IRA
There is not much that you can do other than encourage your company to change the plan and make it a safe harbor plan (or find a new job). But that would require them to pony up more money to encourage participation - either a much better match or a direct employer contribution to the 401k for all employees regardless of their partiticaption in the plan (providing they were eligible to participate). It is actually their stingy matching that results in the low participation rate that is limiting your max contribution rate. If they matched at even 50%, I bet the average participation rate would jump up close to 6%.

No, you don't get to put $6K into each if you have both a Roth and Traditional - its $6K combined. And because you have a retirement plan your ability to deduct a traditional IRA may be limited.

"It is actually their stingy matching that results in the low participation rate that is limiting your max contribution rate. If they matched at even 50%, I bet the average participation rate would jump up close to 6%."

FWIW - this has not been my experience at all. Some work populations just never want to join or participate in the 401K and dependent upon the salary spreads the matching %'s have little or no impact.
YMMV

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Re: Highly Compensated Employee & 401K limits

Post by Spirit Rider » Tue Oct 01, 2019 8:49 am

jyoung wrote:
Tue Oct 01, 2019 8:27 am
This is not what I use it for, but I *think* this may be one of the reasons for my company's 401k after tax contribution option. My understanding is you could contribute after tax up to the limit and then roll into the Roth 401k once a year (plan limit), similar to how I do once I hit the $19k limit. Others would probably know more, and your plan may not offer after tax contributions, but that might be an option?
Even in a safe harbor plan, employee after-tax contributions are subject to ACP testing.

Even if the OP's 401k supports employee after-tax contributions and (in-plan Roth rollovers and/or in-service rollovers).

The results of the ADP testing indicates that the ACP testing would probably fail even more miserably and the OP would get very little additional tax-advantaged contribution space.

The best solution for the OP is to lobby for a safe harbor plan. Or if the 401k plan is top heavy, maybe they could be convinced to use the top 20% compensation for HCE designation.

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Re: Highly Compensated Employee & 401K limits

Post by ERISA Stone » Tue Oct 01, 2019 9:17 am

deikel wrote:
Tue Oct 01, 2019 7:32 am
fascinating, I never heard of this before, but it seems a real thing:

https://smartasset.com/retirement/401k- ... d-employee

Lets hope my administration never figures that out....

I guess its an indirect attempt to make sure employers educate their employees to contribute and put some force behind it since they threaten management with lower contributions if they don't and can not get the contribution levels up....odd indeed
The testing is designed to prevent owners from benefitting in a discriminate manner. Without nondiscrimination testing, a lot of owners wouldn't be inclined to even mention the plan to employees. I used to see this even with testing. I can't imagine how bad it would be if testing weren't required.

Also, even if the plan document doesn't specifically limit an HCEs deferral rate, a company can impose a limit as an administrative provision. The fact that the company from the OP is saying he must defer within 2% of the NHCE makes me think they are using prior plan year testing, which means they are using last year's results to pass this year's test.

This absolutely sucks for someone in OP's position of barely reaching HCE status. For someone who makes the compensation limit (a lot of owners), they still come close to hitting the deferral $ limit amount, even with the percentage cap.

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Re: Highly Compensated Employee & 401K limits

Post by DVMResident » Tue Oct 01, 2019 10:33 am

ERISA Stone wrote:
Tue Oct 01, 2019 9:17 am
deikel wrote:
Tue Oct 01, 2019 7:32 am
fascinating, I never heard of this before, but it seems a real thing:

https://smartasset.com/retirement/401k- ... d-employee

Lets hope my administration never figures that out....

I guess its an indirect attempt to make sure employers educate their employees to contribute and put some force behind it since they threaten management with lower contributions if they don't and can not get the contribution levels up....odd indeed
The testing is designed to prevent owners from benefitting in a discriminate manner. Without nondiscrimination testing, a lot of owners wouldn't be inclined to even mention the plan to employees. I used to see this even with testing. I can't imagine how bad it would be if testing weren't required.

Also, even if the plan document doesn't specifically limit an HCEs deferral rate, a company can impose a limit as an administrative provision. The fact that the company from the OP is saying he must defer within 2% of the NHCE makes me think they are using prior plan year testing, which means they are using last year's results to pass this year's test.

This absolutely sucks for someone in OP's position of barely reaching HCE status. For someone who makes the compensation limit (a lot of owners), they still come close to hitting the deferral $ limit amount, even with the percentage cap.
Reading the OP, the accounting department “asked” the OP to lower his contributions. This is not the same as “must.” Because there is no way of knowing by how much the discrimination test will be failed by a priori (maybe accounting/HR knows, but not the OP), I would be decline the request, continue to contribute beyond their requested amount, and just see what gets refunded. This way the OP’s get the maximum allowed. It’s more work for HR/accounting, but again this is self-inflicted on their part from not meeting Safe Harbor criteria.

At the same time, work with HR on the issue (e.g safe harbor as previously mentioned).

P.S. I agree with your sentiment on the validity of the discriminatory test, but will avoid the topic to keep with the spirit of the forum policies.

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Re: Highly Compensated Employee & 401K limits

Post by CoastalWinds » Tue Oct 01, 2019 10:46 am

deikel wrote:
Tue Oct 01, 2019 7:32 am
fascinating, I never heard of this before, but it seems a real thing:

https://smartasset.com/retirement/401k- ... d-employee

Lets hope my administration never figures that out....

I guess its an indirect attempt to make sure employers educate their employees to contribute and put some force behind it since they threaten management with lower contributions if they don't and can not get the contribution levels up....odd indeed
This article said something odd, and I believe to be incorrect. It said that in 2018, the 401k contribution limit is $18,500 for single or $19,000 for married filing jointly. I do not believe the contribution limit varies with one’s marriage or tax filing status.

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Re: Highly Compensated Employee & 401K limits

Post by Spirit Rider » Tue Oct 01, 2019 11:00 am

DVMResident wrote:
Tue Oct 01, 2019 10:33 am
Reading the OP, the accounting department “asked” the OP to lower his contributions. This is not the same as “must.” Because there is no way of knowing by how much the discrimination test will be failed by a priori (maybe accounting/HR knows, but not the OP), I would be decline the request, continue to contribute beyond their requested amount, and just see what gets refunded. This way the OP’s get the maximum allowed. It’s more work for HR/accounting, but again this is self-inflicted on their part from not meeting Safe Harbor criteria.
This is uniformly bad advice. The employer is not just making this up.

By 7/1, the 401k plan certainly knows to a close approximation what the average NHCE and HCE ADPs are. Blindly contributing the maximum makes no sense. The excess contributions will be returned to you with the earnings subject to ordinary income taxes. If you had followed their recommendation and instead invested in taxable. The money would still be invested with no tax liability.

The last employer I had without a safe harbor plan would notify HCEs in late April what the projected HCE limit would be for the year. I would adjust by what I had already contributed and rounded up to the next integer % (election precision). That way I averaged just several hundred in excess contributions and minimal taxable earnings.

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Re: Highly Compensated Employee & 401K limits

Post by Spirit Rider » Tue Oct 01, 2019 11:05 am

CoastalWinds wrote:
Tue Oct 01, 2019 10:46 am
deikel wrote:
Tue Oct 01, 2019 7:32 am
fascinating, I never heard of this before, but it seems a real thing:

https://smartasset.com/retirement/401k- ... d-employee

Lets hope my administration never figures that out....

I guess its an indirect attempt to make sure employers educate their employees to contribute and put some force behind it since they threaten management with lower contributions if they don't and can not get the contribution levels up....odd indeed
This article said something odd, and I believe to be incorrect. It said that in 2018, the 401k contribution limit is $18,500 for single or $19,000 for married filing jointly. I do not believe the contribution limit varies with one’s marriage or tax filing status.
It's not odd, it's flat out bogus.

This is not the first time smart asset in not so smart. This one is so bad, I don't think I would ever trust anything on that website.

$18.5K is the 2018 limit and $19K is the 2019 limit. Tax filing status has absolutely nothing to 401k contribution limits.

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Re: Highly Compensated Employee & 401K limits

Post by Atilla » Tue Oct 01, 2019 11:06 am

It is what it is.You don't want to over-contribute because you'll just get the excess back and get taxed on it as income - just another hassle to deal with at tax time.

Our current 401K provider is good enough to cut me off when I hit the limit, which the last couple years has been in early September. Just invest the excess in taxable and enjoy paying more income tax because they stopped your 401K deductions until the new year. :annoyed
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Re: Highly Compensated Employee & 401K limits

Post by ERISA Stone » Tue Oct 01, 2019 11:07 am

Spirit Rider wrote:
Tue Oct 01, 2019 11:00 am
DVMResident wrote:
Tue Oct 01, 2019 10:33 am
Reading the OP, the accounting department “asked” the OP to lower his contributions. This is not the same as “must.” Because there is no way of knowing by how much the discrimination test will be failed by a priori (maybe accounting/HR knows, but not the OP), I would be decline the request, continue to contribute beyond their requested amount, and just see what gets refunded. This way the OP’s get the maximum allowed. It’s more work for HR/accounting, but again this is self-inflicted on their part from not meeting Safe Harbor criteria.
This is uniformly bad advice. The employer is not just making this up.

By 7/1, the 401k plan certainly knows to a close approximation what the average NHCE and HCE ADPs are. Blindly contributing the maximum makes no sense. The excess contributions will be returned to you with the earnings subject to ordinary income taxes. If you had followed their recommendation and instead invested in taxable. The money would still be invested with no tax liability.

The last employer I had without a safe harbor plan would notify HCEs in late April what the projected HCE limit would be for the year. I would adjust by what I had already contributed and rounded up to the next integer % (election precision). That way I averaged just several hundred in excess contributions and minimal taxable earnings.
Also, if they are using prior-year testing, they absolutely know the needed rate to pass testing.

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Re: Highly Compensated Employee & 401K limits

Post by CoastalWinds » Tue Oct 01, 2019 11:09 am

I am a HCE employee in a safe harbor 401k plan with a 4% match. While I am able to reach the annual elective deferral limit, plan discrimination testing prevents me from being able to direct any bonus/profit sharing to the 401k (to take advantage of the higher total limits on 401k plans). So a safe harbor plan is not a panacea.

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Re: Highly Compensated Employee & 401K limits

Post by UpsetRaptor » Tue Oct 01, 2019 11:13 am

Spirit Rider wrote:
Tue Oct 01, 2019 11:00 am
DVMResident wrote:
Tue Oct 01, 2019 10:33 am
Reading the OP, the accounting department “asked” the OP to lower his contributions. This is not the same as “must.” Because there is no way of knowing by how much the discrimination test will be failed by a priori (maybe accounting/HR knows, but not the OP), I would be decline the request, continue to contribute beyond their requested amount, and just see what gets refunded. This way the OP’s get the maximum allowed. It’s more work for HR/accounting, but again this is self-inflicted on their part from not meeting Safe Harbor criteria.
This is uniformly bad advice. The employer is not just making this up.

By 7/1, the 401k plan certainly knows to a close approximation what the average NHCE and HCE ADPs are. Blindly contributing the maximum makes no sense. The excess contributions will be returned to you with the earnings subject to ordinary income taxes. If you had followed their recommendation and instead invested in taxable. The money would still be invested with no tax liability.

The last employer I had without a safe harbor plan would notify HCEs in late April what the projected HCE limit would be for the year. I would adjust by what I had already contributed and rounded up to the next integer % (election precision). That way I averaged just several hundred in excess contributions and minimal taxable earnings.
I rarely have a question regarding Spirit Rider's advice, but just for my own clarification sake: What's the difference if OP follows HR's advice and defers 5% to help the plan conform while taking the rest of his/her preferred say 10% savings as taxable earnings, vs just deferring 15% which later comes back as "you could only do 5% so here's the other 10% back as taxable earnings"? Does it not work out equally to OP, like the latter scenario involves an extra negative hit somehow?

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Re: Highly Compensated Employee & 401K limits

Post by UpsetRaptor » Tue Oct 01, 2019 11:55 am

It could be worse OP. My company unexpectedly took a hit by failing the HCE discrimination testing one year. The over-reaction response of our surprised HR department was to simply disallow HCEs from contributing to the company 401(k) plan any year moving forward. HCEs instead get access to a "deferred compensation plan" which they claim is the same because it's the same (not great) match. But it's actually a terrible DC plan, if the company ever files Chapter 11 - which is a nonzero chance and almost happened once before - you lose everything including contributions, and upon separation it's all distributed in one or two years so big tax hit. Bleach.

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Re: Highly Compensated Employee & 401K limits

Post by Spirit Rider » Tue Oct 01, 2019 11:58 am

UpsetRaptor wrote:
Tue Oct 01, 2019 11:13 am
Spirit Rider wrote:
Tue Oct 01, 2019 11:00 am
This is uniformly bad advice. The employer is not just making this up.

By 7/1, the 401k plan certainly knows to a close approximation what the average NHCE and HCE ADPs are. Blindly contributing the maximum makes no sense. The excess contributions will be returned to you with the earnings subject to ordinary income taxes. If you had followed their recommendation and instead invested in taxable. The money would still be invested with no tax liability.

The last employer I had without a safe harbor plan would notify HCEs in late April what the projected HCE limit would be for the year. I would adjust by what I had already contributed and rounded up to the next integer % (election precision). That way I averaged just several hundred in excess contributions and minimal taxable earnings.
I rarely have a question regarding Spirit Rider's advice, but just for my own clarification sake: What's the difference if OP follows HR's advice and defers 5% to help the plan conform while taking the rest of his/her preferred say 10% savings as taxable earnings, vs just deferring 15% which later comes back as "you could only do 5% so here's the other 10% back as taxable earnings"? Does it not work out equally to OP, like the latter scenario involves an extra negative hit somehow?
As I stated, the two options:
  1. If you only contribute 5% to the 401k and 10% to taxable. No 401k dollars are returned and the capital gains in taxable are not realized and taxed.
  2. If you contribute 15% to the 401k. The 10% is returned and so are the earnings subject to ordinary income taxes.
Bottom line of the two options:
  1. The 10% remains invested and there are no taxes on the capital gains until you sell them and only at the much lower long-term capital gains tax rates. Assuming you properly hold them that long.
  2. The 10% is returned to you, all earnings are subject to the much higher ordinary income tax rates and the tax is due for that year. This costs you in current year taxes and you missed out on the gains you could have had if you chose option 1.

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Re: Highly Compensated Employee & 401K limits

Post by cherijoh » Sun Oct 06, 2019 9:17 pm

CoastalWinds wrote:
Tue Oct 01, 2019 11:09 am
I am a HCE employee in a safe harbor 401k plan with a 4% match. While I am able to reach the annual elective deferral limit, plan discrimination testing prevents me from being able to direct any bonus/profit sharing to the 401k (to take advantage of the higher total limits on 401k plans). So a safe harbor plan is not a panacea.
Are non-HCEs allowed to put bonus/profit sharing into the 401k? My former employer didn't allow anyone to contribute beyond the annual IRS limit for pre-tax contributions (plus catch-up if 50+) although yout bonus could be used towards your regular contribution limits.

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Re: Highly Compensated Employee & 401K limits

Post by OnTrack » Mon Oct 07, 2019 11:26 pm

Spirit Rider wrote:
Tue Oct 01, 2019 8:49 am
The best solution for the OP is to lobby for a safe harbor plan. Or if the 401k plan is top heavy, maybe they could be convinced to use the top 20% compensation for HCE designation.
Or the company could make "qualified non-elective contributions" (QNEC) to the NHCEs.

anoop
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Re: Highly Compensated Employee & 401K limits

Post by anoop » Tue Oct 08, 2019 2:18 am

Does this work for megacorps and does it impact non deductible contributions?

jsaver
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Re: Highly Compensated Employee & 401K limits

Post by jsaver » Tue Oct 08, 2019 2:57 am

I’m at a mega corp (F50) and an HCE. Company matches 6% and I’m capped at 16%. Applies to wages and personal bonus. Company bonus went 100% into everyone’s 401(k). I’ll get close to $50k total put into my 401(k) this year. After hitting $19k contributions automatically switch to after-tax and I elected for in-plan daily automatic roll over of after-tax to Roth.

It is a very generous plan.

Spirit Rider
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Re: Highly Compensated Employee & 401K limits

Post by Spirit Rider » Tue Oct 08, 2019 10:53 am

OnTrack wrote:
Mon Oct 07, 2019 11:26 pm
Spirit Rider wrote:
Tue Oct 01, 2019 8:49 am
The best solution for the OP is to lobby for a safe harbor plan. Or if the 401k plan is top heavy, maybe they could be convinced to use the top 20% compensation for HCE designation.
Or the company could make "qualified non-elective contributions" (QNEC) to the NHCEs.
It is very rare for 401k plans to use QNECs for plan testing failures. E.g. They only use QNECs if the total company contribution would be < $10K.

Spirit Rider
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Re: Highly Compensated Employee & 401K limits

Post by Spirit Rider » Tue Oct 08, 2019 10:57 am

anoop wrote:
Tue Oct 08, 2019 2:18 am
Does this work for megacorps and does it impact non deductible contributions?
Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) testing applies to all non-safe harbor 401k plans. ADP testing is done on employee deferrals and ACP testing is done on employer contributions. Additionally, regardless if it is a safe harbor plan ACP testing applies to employee after-tax contributions

Clarice
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Re: Highly Compensated Employee & 401K limits

Post by Clarice » Tue Oct 08, 2019 11:49 am

Are non safe harbor plans subject to HCE and ADP testing if they don’t match at all....?

Few options suggested including increasing the match rate, changing the plan type, but I think you can get around this by having no match whatsoever...

Spirit Rider
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Re: Highly Compensated Employee & 401K limits

Post by Spirit Rider » Tue Oct 08, 2019 1:40 pm

Clarice wrote:
Tue Oct 08, 2019 11:49 am
Are non safe harbor plans subject to HCE and ADP testing if they don’t match at all....?

Few options suggested including increasing the match rate, changing the plan type, but I think you can get around this by having no match whatsoever...
Absolutely. Anti-discrimination rules are to prevent only highly compensated employees and owners from getting a disproportionate tax benefit.

Only a safe harbor plan waives ADP testing for employee deferrals, ACP testing for employer contributions and overall top heaving testing.

No match would only make it more likely that the allowed HCA contributions would be even lower.

Clarice
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Re: Highly Compensated Employee & 401K limits

Post by Clarice » Tue Oct 08, 2019 3:18 pm

Spirit Rider wrote:
Tue Oct 08, 2019 1:40 pm
Clarice wrote:
Tue Oct 08, 2019 11:49 am
Are non safe harbor plans subject to HCE and ADP testing if they don’t match at all....?

Few options suggested including increasing the match rate, changing the plan type, but I think you can get around this by having no match whatsoever...
Absolutely. Anti-discrimination rules are to prevent only highly compensated employees and owners from getting a disproportionate tax benefit.

Only a safe harbor plan waives ADP testing for employee deferrals, ACP testing for employer contributions and overall top heaving testing.

No match would only make it more likely that the allowed HCA contributions would be even lower.
So why would anyone ever have a non safe harbor plan?

anon_investor
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Re: Highly Compensated Employee & 401K limits

Post by anon_investor » Tue Oct 08, 2019 3:28 pm

I am at a mega corp and a HCE, fortunately the percentage cap for regular/roth contributions for me ends up being higher than $19k (probably a lot of HCE that make a lot more than me!). But the percentage cap for after-tax contributions is quite low, which means while I am fortunate enough to partially partake in a mega backdoor roth 401k, it is imited so I can never come close to reaching the overall $56k cap. But I didn't even have that option before at my old employer, so I cannot complain too much. :happy

ERISA Stone
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Re: Highly Compensated Employee & 401K limits

Post by ERISA Stone » Tue Oct 08, 2019 3:41 pm

Clarice wrote:
Tue Oct 08, 2019 3:18 pm
Spirit Rider wrote:
Tue Oct 08, 2019 1:40 pm
Clarice wrote:
Tue Oct 08, 2019 11:49 am
Are non safe harbor plans subject to HCE and ADP testing if they don’t match at all....?

Few options suggested including increasing the match rate, changing the plan type, but I think you can get around this by having no match whatsoever...
Absolutely. Anti-discrimination rules are to prevent only highly compensated employees and owners from getting a disproportionate tax benefit.

Only a safe harbor plan waives ADP testing for employee deferrals, ACP testing for employer contributions and overall top heaving testing.

No match would only make it more likely that the allowed HCA contributions would be even lower.
So why would anyone ever have a non safe harbor plan?
Cost. SH contributions are required and 100% vested. Also, in most cases, the company must elect prior to the plan year if they plan to have a safe harbor contribution. There are plenty of companies that aren't comfortable with this kind of financial obligation.

401(k) Gee(k)
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Re: Highly Compensated Employee & 401K limits

Post by 401(k) Gee(k) » Tue Oct 08, 2019 4:36 pm

Another possibility is if the employee is age 50 (or greater) in the year AND the plan allows for Age 50+ catch up contributions, you can contribute up to the maximum under the catch-up limit which is $6,000 for 2019. Now, pragmatically most 401k plans will kick on the catch up after the initial limit is attained ($19K in 2019) so, if eligible, you may have to over contribute than what your HR wants and get a refund for the excess under the 19K limit due to the plan's failed ADP (Actual Deferral Percentage) test but you would be able to keep the age-50 catch up contributions in the plan.

401(k) Gee(k)
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Re: Highly Compensated Employee & 401K limits

Post by 401(k) Gee(k) » Tue Oct 08, 2019 4:51 pm

As others have mentioned on this thread re: encouraging non-highly compensated employees to contribute more, in a similar vein you can also discourage other Highly Compensated Employees (which also includes 5% or more owners and their family members who are employed by the company). Basically, if they don't contribute or do so minimally they create more capacity under the average calculations for the Highly Compensated Employee group.

Spirit Rider
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Re: Highly Compensated Employee & 401K limits

Post by Spirit Rider » Tue Oct 08, 2019 5:21 pm

ERISA Stone wrote:
Tue Oct 08, 2019 3:41 pm
Clarice wrote:
Tue Oct 08, 2019 3:18 pm
So why would anyone ever have a non safe harbor plan?
Cost. SH contributions are required and 100% vested. Also, in most cases, the company must elect prior to the plan year if they plan to have a safe harbor contribution. There are plenty of companies that aren't comfortable with this kind of financial obligation.
The cost and vesting can be intertwined. I worked for a Fortune 500 company that gave 3% non elective contributions. That meets one of the safe harbor plan contribution options, but they preferred to have a vesting schedule and thus no safe harbor plan. Luckily. the plan used the prior year for ADP/ADP testing. HCEs were typically limited to 5% - 6% employee deferrals, but at least didn't have to deal with returning excess deferrals and earnings.

The company had a lot of hourly employees with high turnover. So they ultimately paid very little of those employer contributions. It would have cost them less if they matched 50% of the first 6% of compensation. It still wouldn't have been a safe harbor plan with the vesting, but maybe that would have resulted in a higher NHCE average deferral percentage and a higher allowed HCE average deferral percentage.

PharmerBrown
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Re: Highly Compensated Employee & 401K limits

Post by PharmerBrown » Tue Oct 08, 2019 6:27 pm

FWIW - this has not been my experience at all. Some work populations just never want to join or participate in the 401K and dependent upon the salary spreads the matching %'s have little or no impact.
YMMV
[/quote]

I agree. Therefore, the key to increasing the HCE contribution is having your company implement automatic enrollment, and automatic annual contribution increases.

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