highly compensated employee (HCE) Time bomb?

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CnC
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highly compensated employee (HCE) Time bomb?

Post by CnC » Wed Oct 09, 2019 9:11 am

I recently read a thread where a poster was told by his company that he was a HCE and it basically eliminated his ability to contribute a reasonable amount to his 401k.


A few questions:
Let's remove the question regarding fairness and just accept life is not fair for forum rules.

If I'm a diligent saver maxing my 457 out at (currently) under 100k and in a few years I break 120k (or 130k due to inflation) my ability to drop to next to nothing since my employer's 457 plan had moderately high fees and no match so very little participation. Is this correct?

My wife works at super mega Corp and for the first time made more than 120k last year. We haven't been told anything about HCE so I'm assuming she doesn't qualify?

My wife's employer allows for after tax contributions and in service roll overs so we are currently able to save the maximum 56k between Roth roll overs company match and pre-tax 401k. Do we run the risk of her breaking into the top 20% in the next promotion or two and then going from ±40% combined saving rate down to ±6? does anyone have any suggestions on how my wife could talk to her employer to see where that magical top 20% of earners line is?

Correct me if I am wrong but that bump into becoming a HCE actually is a huge penalty and unless you continue to get substantial races from that point you are better off financially not getting any raises and staying under that amount staying under that amount.
Last edited by CnC on Wed Oct 09, 2019 9:39 am, edited 1 time in total.

jebmke
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Re: highly compensated employee (HCE) Time bomb?

Post by jebmke » Wed Oct 09, 2019 9:19 am

To fully explain the HCE rules would venture quickly into a discussion of public policy which is not condoned on this site.

In fact, as a general rule, questions about "fairness" of almost anything are almost impossible to avoid having the thread eventually locked since the conversation often turns into a back and forth launch of opinions about fairness.

I suspect there are copious documents on the internet that discuss the background of this provision of the pension laws so that is where I would suggest starting.
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Re: highly compensated employee (HCE) Time bomb?

Post by Grt2bOutdoors » Wed Oct 09, 2019 9:24 am

There are a lot of “what if’s” in life but that should not be an impediment to actually living your life. Just continue as you are already doing so and when/if you come to an actual hurdle in your path you can then figure out how to alleviate the issue. It’s a waste of time resources otherwise.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: highly compensated employee (HCE) Time bomb?

Post by CnC » Wed Oct 09, 2019 9:35 am

jebmke wrote:
Wed Oct 09, 2019 9:19 am
To fully explain the HCE rules would venture quickly into a discussion of public policy which is not condoned on this site.

In fact, as a general rule, questions about "fairness" of almost anything are almost impossible to avoid having the thread eventually locked since the conversation often turns into a back and forth launch of opinions about fairness.

I suspect there are copious documents on the internet that discuss the background of this provision of the pension laws so that is where I would suggest starting.
Would you then mind pointing to some of the copious documents?

Because I have searched and the info is extremely vague and unhelpful.

All that I have been able to locate is 120k is a hard cutoff. 5% of the company is a hard cutoff and top 20% is a hard cutoff.

If you pass 2? Or more of these you are in essence prevented from using a 401k to save for retirement.

Let's forget about fairness and go into logistics then. Once you call into the hce pit are you just done with 401k's? Is there anything that can be done to avoid this cliff other than refusing a raise or a promotion? My wife's example of saving 56k tax advantaged at top 21% of her company to being limited to saving ±8k is an enormous cost for a few thousand dollar raise.

How does one plan their investing for retirement around a question as giant as this?

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Re: highly compensated employee (HCE) Time bomb?

Post by CnC » Wed Oct 09, 2019 9:38 am

Grt2bOutdoors wrote:
Wed Oct 09, 2019 9:24 am
There are a lot of “what if’s” in life but that should not be an impediment to actually living your life. Just continue as you are already doing so and when/if you come to an actual hurdle in your path you can then figure out how to alleviate the issue. It’s a waste of time resources otherwise.
With all do respect I disagree with this statement fervently.

I would be nowhere near where I am in life if I just waited untill I had a problem before I before I even thought about how it's dealt with. I was taught since a young age it's better to keep your eyes up and ahead of you so you can avoid the hurdles rather than have him to try and climb over them once you're there. It has worked exceedingly well for my family so I plan to continue to do so. I'm the kind of person that likes to know I have enough gas to get where I'm going and not hope to find a gas station halfway between here and my destination.

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Re: highly compensated employee (HCE) Time bomb?

Post by HomeStretch » Wed Oct 09, 2019 9:39 am

It’s unfortunate. Spouse and I have run into this. The good news is that from higher incomes you can still save a lot using a Taxable account. At retirement, you will appreciate the diversification of savings in tax-deferred, Roth and Taxable accounts.
Last edited by HomeStretch on Wed Oct 09, 2019 9:50 am, edited 1 time in total.

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Re: highly compensated employee (HCE) Time bomb?

Post by Dottie57 » Wed Oct 09, 2019 9:46 am

HomeStretch wrote:
Wed Oct 09, 2019 9:39 am
+1.

It’s unfortunate. Spouse and I have run into this. The good news is that from higher incomes you can still save a lot using a Taxable account. At retirement, you will appreciate the diversification of savings in tax-deferred, Roth and Taxable accounts.
Having a good sized taxable account is a good thing. Look at all of the worrying that goes on about RMDs in the forum.

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Re: highly compensated employee (HCE) Time bomb?

Post by rich126 » Wed Oct 09, 2019 9:46 am

It is simply a rule/law from the IRS.

https://smartasset.com/retirement/401k- ... d-employee
Received $120,000 or more in compensation from the employer that sponsors his or her 401(k) plan in the previous year.

Owns more than 5% of interest in the business sponsoring the plan at any point during the last year, regardless of compensation.

And according to the IRS, your employer can choose to designate you a highly compensated employee if you rank among the top 20% of employees when it comes to compensation.
I'm not sure of the details but I've been over that amount for a while and haven't encountered any issues. And there are more things involved than just what I copied above.

There are lots of things that don't always make sense but you have to follow. If you don't like it, write to congress.

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Re: highly compensated employee (HCE) Time bomb?

Post by Jack FFR1846 » Wed Oct 09, 2019 9:47 am

There is no specific $$ cutoff. I was limited at one company as a HCE when I made $75k a year. I was NOT limited nor cut off at 2 different companies where a year, I made over $200k a year. The difference is in the participation of lower wage workers. If everyone in the assembly areas of a factory contributes to a 401k, you'll likely be fine. This can be promoted by the company by providing a generous match. Where I was limited, there was no match and a lot of near minimum wage workers in the factory. There was no action needed on my part when I was limited. From memory, a limit was implemented and my contributions reduced with no input from me. It's not something that a worker can do anything about, nor should they.
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Re: highly compensated employee (HCE) Time bomb?

Post by cheese_breath » Wed Oct 09, 2019 9:48 am

Be thankful you're not one of the many who don't have to worry about this because they don't earn enough to be affected by the HCE rule.
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Re: highly compensated employee (HCE) Time bomb?

Post by rascott » Wed Oct 09, 2019 9:48 am

CnC wrote:
Wed Oct 09, 2019 9:11 am
I recently read a thread where a poster was told by his company that he was a HCE and it basically eliminated his ability to contribute a reasonable amount to his 401k.


A few questions:
Let's remove the question regarding fairness and just accept life is not fair for forum rules.

If I'm a diligent saver maxing my 457 out at (currently) under 100k and in a few years I break 120k (or 130k due to inflation) my ability to drop to next to nothing since my employer's 457 plan had moderately high fees and no match so very little participation. Is this correct?

My wife works at super mega Corp and for the first time made more than 120k last year. We haven't been told anything about HCE so I'm assuming she doesn't qualify?

My wife's employer allows for after tax contributions and in service roll overs so we are currently able to save the maximum 56k between Roth roll overs company match and pre-tax 401k. Do we run the risk of her breaking into the top 20% in the next promotion or two and then going from ±40% combined saving rate down to ±6? does anyone have any suggestions on how my wife could talk to her employer to see where that magical top 20% of earners line is?

Correct me if I am wrong but that bump into becoming a HCE actually is a huge penalty and unless you continue to get substantial races from that point you are better off financially not getting any raises and staying under that amount staying under that amount.

This is impossible for anyone here to answer.... you'd have to ask your HR.

If your wife works for a mega-corp, I doubt that's a concern for her situation. And they likely gave deferred comp plans available if it was.

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Re: highly compensated employee (HCE) Time bomb?

Post by Grt2bOutdoors » Wed Oct 09, 2019 9:52 am

CnC wrote:
Wed Oct 09, 2019 9:38 am
Grt2bOutdoors wrote:
Wed Oct 09, 2019 9:24 am
There are a lot of “what if’s” in life but that should not be an impediment to actually living your life. Just continue as you are already doing so and when/if you come to an actual hurdle in your path you can then figure out how to alleviate the issue. It’s a waste of time resources otherwise.
With all do respect I disagree with this statement fervently.

I would be nowhere near where I am in life if I just waited untill I had a problem before I before I even thought about how it's dealt with. I was taught since a young age it's better to keep your eyes up and ahead of you so you can avoid the hurdles rather than have him to try and climb over them once you're there. It has worked exceedingly well for my family so I plan to continue to do so. I'm the kind of person that likes to know I have enough gas to get where I'm going and not hope to find a gas station halfway between here and my destination.
Companies can choose to create a safe harbor plan that mitigates these issues you think may be a problem. You can disagree but there is a vast difference between having gas in the tank and being able to save. Irrespective of actual tax law, there is absolutely nothing that prevents anyone from saving something. As has been discussed on this forum a number of times, the difference between a tax deferred and a taxable account; one is yours entirely and the other is a partnership where 1 minus the tax belongs to you.
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Re: highly compensated employee (HCE) Time bomb?

Post by nisiprius » Wed Oct 09, 2019 9:55 am

Well, yeah, this happens when you work for a stingy company that doesn't make a decent 401(k) match. It's just something to be aware of when evaluating a job opportunity. If the 401(k) match is stingy, then not only are you getting less money, but also there is a chance of HCE's running into problems.

But the good thing is, the higher-ups who set policy are almost certainly HCE's and thus are in the same boat, and if they don't want this problem themselves, they have to do something to get the participation up.

How bad it is depends on what the IRS determines to have been an "excess contribution." When it happened to me, it wasn't any "time bomb," just a nuisance. I was just told I'd overcontributed, got a check in the mail, for something like $318, returning my overcontribution. Since, of course, I'd already filed taxes, not paying taxes on money contributed to the 401(k), I had to recalculate and pay taxes on that $318. It was a nuisance because of the time delays. It two years to get the taxes straightened out. You don't know that you're overcontributing in year X. In year X+1 the calculations get made, the IRS tells the 401(k) plan manager, the 401(k) manager sends out the notices and the checks, which--being year X+1 income--end up going on your tax return for year X+2.

Remember that the whole 401(k) thing was never really designed, it just happened. A clever consultant saw an obscure tax regulation that wasn't intended to be a retirement plan, and made it one. Then businesses adopted it enthusiastically, because it was much cheaper and easier for the business than traditional defined-benefit pensions.

The rules are in place to insure that the 401(k) plan is being run in good faith as a retirement plan for everyone, not just a perk for a handful of higher-ups.

It's not "a huge penalty," it's just the taxes on the amount you overcontributed. If you have an idea that it's a problem, don't max out your 401(k) contributions. When it happened to me, I got back a check for something like $318 that I'd over contributed, so I just cut down my 401(k) contributions by something like $500 or $600 (extra for Kentucky windage) and it didn't happen again. And it doesn't come on suddenly, all-or-nothing. If participation is slightly too small, then HCEs can still contribute, they just can't contribute the plan maximum.

It's my opinion that it is always better to get raises.
How does one plan their investing for retirement around a question as giant as this?
You can't plan for everything. Stuff happens. And even when you think you can plan, "man plans, and God laughs." You can work yourself into a swivet digging into IRS regulations, but the crucial uncertainty here isn't the tax code, it's about future decisions your company's upper management might make about the 401(k) plan.
Last edited by nisiprius on Wed Oct 09, 2019 10:16 am, edited 8 times in total.
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Re: highly compensated employee (HCE) Time bomb?

Post by Pigeye Brewster » Wed Oct 09, 2019 10:03 am

CnC wrote:
Wed Oct 09, 2019 9:11 am
If I'm a diligent saver maxing my 457 out at (currently) under 100k and in a few years I break 120k (or 130k due to inflation) my ability to drop to next to nothing since my employer's 457 plan had moderately high fees and no match so very little participation. Is this correct?

My wife works at super mega Corp and for the first time made more than 120k last year. We haven't been told anything about HCE so I'm assuming she doesn't qualify?
The HCE limit is indexed to inflation (in $5k increments). It was $120k for 2015-2018. It was raised to $125k for 2019 (which would apply to plan year 2020).

https://www.irs.gov/retirement-plans/co ... tributions

If the plan happens to be a safe harbor plan, it is exempt from ADP/ACP discrimination testing for employee contributions. With one exception, that being after-tax contributions are still subject to ACP testing.

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Re: highly compensated employee (HCE) Time bomb?

Post by HomeStretch » Wed Oct 09, 2019 10:11 am

Your wife’s company likely knows the results of the plan’s discrimination testing and the impact, if any, on HCE’s 2019 contributions. Most companies are proactive about addressing projected testing failures and limit HCE deferrals to avoid returning excess contributions in the following tax year (unless the company plans to make an additional match for non-HCE participants). Most companies communicate this in writing to affected employees.

I suggest your wife wait to see if she is affected by a plan testing failure. If you can’t wait, then your wife can talk in a low-key way to the 401k coordinator at her company to ask if (1) she is an HCE and (2) has the company pass its 2019 discrimination testing.
Last edited by HomeStretch on Wed Oct 09, 2019 10:14 am, edited 1 time in total.

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Re: highly compensated employee (HCE) Time bomb?

Post by Grt2bOutdoors » Wed Oct 09, 2019 10:12 am

The consultant who found the Section 401(k) loophole is Ted Benna, father of the 401k.
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Re: highly compensated employee (HCE) Time bomb?

Post by retiredjg » Wed Oct 09, 2019 10:14 am

CnC wrote:
Wed Oct 09, 2019 9:11 am
If I'm a diligent saver maxing my 457 out at (currently) under 100k and in a few years I break 120k (or 130k due to inflation) my ability to drop to next to nothing since my employer's 457 plan had moderately high fees and no match so very little participation. Is this correct?
This does not seem to be a sentence. Some word is missing somewhere and I have no idea what the question is. Can you try again? :happy


Is a 457 plan even subject to HCE considerations?

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Re: highly compensated employee (HCE) Time bomb?

Post by djpeteski » Wed Oct 09, 2019 10:28 am

IMHO the employer that allows HCE to trigger, and not provide a safe harbor plan, is penny wise and pound foolish.

Meeting the qualifications of a safe harbor plan through reasonable matches is not very expensive, makes an effort to take care of all employees, and is far less than a pension scheme. Also it takes good care of top management.

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Re: highly compensated employee (HCE) Time bomb?

Post by jhfenton » Wed Oct 09, 2019 10:31 am

Pigeye Brewster wrote:
Wed Oct 09, 2019 10:03 am
If the plan happens to be a safe harbor plan, it is exempt from ADP/ACP discrimination testing for employee contributions. With one exception, that being after-tax contributions are still subject to ACP testing.
This is an important point. My mini mega-corp has a safe harbor 401(k) plan, so HCE or not, no one is subject to any limits other than the standard salary deferral limits ($19,000/$25,000). (After-tax contributions are not allowed in our plan.)

There's no reason to worry about your contributions being limited as an HCE until you find yourself in that situation.

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Re: highly compensated employee (HCE) Time bomb?

Post by jebmke » Wed Oct 09, 2019 11:01 am

CnC wrote:
Wed Oct 09, 2019 9:35 am
jebmke wrote:
Wed Oct 09, 2019 9:19 am
To fully explain the HCE rules would venture quickly into a discussion of public policy which is not condoned on this site.

In fact, as a general rule, questions about "fairness" of almost anything are almost impossible to avoid having the thread eventually locked since the conversation often turns into a back and forth launch of opinions about fairness.

I suspect there are copious documents on the internet that discuss the background of this provision of the pension laws so that is where I would suggest starting.
Would you then mind pointing to some of the copious documents?

Because I have searched and the info is extremely vague and unhelpful.

All that I have been able to locate is 120k is a hard cutoff. 5% of the company is a hard cutoff and top 20% is a hard cutoff.

If you pass 2? Or more of these you are in essence prevented from using a 401k to save for retirement.

Let's forget about fairness and go into logistics then. Once you call into the hce pit are you just done with 401k's? Is there anything that can be done to avoid this cliff other than refusing a raise or a promotion? My wife's example of saving 56k tax advantaged at top 21% of her company to being limited to saving ±8k is an enormous cost for a few thousand dollar raise.

How does one plan their investing for retirement around a question as giant as this?
here is the first one that popped up in my search. I didn't look past this.

https://www.investopedia.com/terms/h/hi ... ployee.asp
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Re: highly compensated employee (HCE) Time bomb?

Post by nisiprius » Wed Oct 09, 2019 12:58 pm

jebmke wrote:
Wed Oct 09, 2019 11:01 am
...If you pass 2? Or more of these you are in essence prevented from using a 401k to save for retirement...
I'm not an expert, all I know is what I went through personally. But I certainly wasn't prevented from using a 401k. I just had a dollar limit that was a less than the maximum available to non-HCEs. The awkward thing was that HR didn't seen to be able to tell me in advance any firm value for the number of dollars. But it wasn't boom! surprise! you're an HCE, no 401(k) for you. It was boom! surprise! paperwork and taxes I hadn't expected to have to pay.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: highly compensated employee (HCE) Time bomb?

Post by CnC » Wed Oct 09, 2019 12:59 pm

retiredjg wrote:
Wed Oct 09, 2019 10:14 am
CnC wrote:
Wed Oct 09, 2019 9:11 am
If I'm a diligent saver maxing my 457 out at (currently) under 100k and in a few years I break 120k (or 130k due to inflation) my ability to drop to next to nothing since my employer's 457 plan had moderately high fees and no match so very little participation. Is this correct?
This does not seem to be a sentence. Some word is missing somewhere and I have no idea what the question is. Can you try again? :happy


Is a 457 plan even subject to HCE considerations?
If I wrote it unclear or incorrect I apologise.

I wanted to verify that if I am currently maxing my contributions (19k) at around 20% contributions and my employer has around 2% employee contributions average. This is generous over half the people do not contribute.

If I get a few pay increases and pass the 120k threshold I will be locked into only 2-4% and decrease my maximum contributions by ±$15,000 from the year before I became a HCE.
Is this correct?


Likewise, my wife's $56,000 tax advantaged money could be cut by $45,000-$50,000 if she passes the magical 20% and becomes designated as a HCE.
Is this correct?

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Re: highly compensated employee (HCE) Time bomb?

Post by CnC » Wed Oct 09, 2019 1:00 pm

jebmke wrote:
Wed Oct 09, 2019 11:01 am
CnC wrote:
Wed Oct 09, 2019 9:35 am
jebmke wrote:
Wed Oct 09, 2019 9:19 am
To fully explain the HCE rules would venture quickly into a discussion of public policy which is not condoned on this site.

In fact, as a general rule, questions about "fairness" of almost anything are almost impossible to avoid having the thread eventually locked since the conversation often turns into a back and forth launch of opinions about fairness.

I suspect there are copious documents on the internet that discuss the background of this provision of the pension laws so that is where I would suggest starting.
Would you then mind pointing to some of the copious documents?

Because I have searched and the info is extremely vague and unhelpful.

All that I have been able to locate is 120k is a hard cutoff. 5% of the company is a hard cutoff and top 20% is a hard cutoff.

If you pass 2? Or more of these you are in essence prevented from using a 401k to save for retirement.

Let's forget about fairness and go into logistics then. Once you call into the hce pit are you just done with 401k's? Is there anything that can be done to avoid this cliff other than refusing a raise or a promotion? My wife's example of saving 56k tax advantaged at top 21% of her company to being limited to saving ±8k is an enormous cost for a few thousand dollar raise.

How does one plan their investing for retirement around a question as giant as this?
here is the first one that popped up in my search. I didn't look past this.

https://www.investopedia.com/terms/h/hi ... ployee.asp

I read that prior to posting this, I didn't see any answers to any of my questions there.

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Re: highly compensated employee (HCE) Time bomb?

Post by CnC » Wed Oct 09, 2019 1:03 pm

nisiprius wrote:
Wed Oct 09, 2019 12:58 pm
jebmke wrote:
Wed Oct 09, 2019 11:01 am
...If you pass 2? Or more of these you are in essence prevented from using a 401k to save for retirement...
I'm not an expert, all I know is what I went through personally. But I certainly wasn't prevented from using a 401k. I just had a dollar limit that was a less than the maximum available to non-HCEs. The awkward thing was that HR didn't seen to be able to tell me in advance any firm value for the number of dollars. But it wasn't boom! surprise! you're an HCE, no 401(k) for you. It was boom! surprise! paperwork and taxes I hadn't expected to have to pay.
Ok you have some experience with this so perhaps it's less scary than I imagine. But going from being able to put 19,000 for myself or 50,000+ company match for my wife down to being able to put 4-6k is kind of like "Boom! No 401k" to me.

Granted I have a 457b plan so I don't even know if it applies to me.

And perhaps my wife's company has a "safe harbor" plan that I am in aware of and we are both exempt from this and I made much to do about nothing.

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Re: highly compensated employee (HCE) Time bomb?

Post by GAAP » Wed Oct 09, 2019 1:09 pm

I was an HCE for years -- still managed to retire early. Yes, it limited my ability to save pretax. No, it didn't make retirement impossible.

As for being better off not getting any raises, it depends on the scale of the raises you miss...
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Re: highly compensated employee (HCE) Time bomb?

Post by milktoast » Wed Oct 09, 2019 1:19 pm

I would wait to worry about this until it impacts you.

What you can do to help your future self is to encourage your peers (who are under the HCE threshold) to maximize their contributions.

HCE doesn't suddenly limit your contributions. Safe harbor is an out. But so is good participation rates from non-HCE.

Only your own HR dept can tell you what the limits are for HCE. If you are worried, ask them for information on the current limits. And if there are limits, encourage them to consider a safe-harbor plan.

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Re: highly compensated employee (HCE) Time bomb?

Post by cliffedelgado » Wed Oct 09, 2019 1:33 pm

CnC wrote:
Wed Oct 09, 2019 1:03 pm
And perhaps my wife's company has a "safe harbor" plan that I am in aware of and we are both exempt from this and I made much to do about nothing.
Safe harbor plans still have to pass ACP testing if they allow after-tax contributions.

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Re: highly compensated employee (HCE) Time bomb?

Post by marcopolo » Wed Oct 09, 2019 2:11 pm

CnC wrote:
Wed Oct 09, 2019 1:03 pm
nisiprius wrote:
Wed Oct 09, 2019 12:58 pm
jebmke wrote:
Wed Oct 09, 2019 11:01 am
...If you pass 2? Or more of these you are in essence prevented from using a 401k to save for retirement...
I'm not an expert, all I know is what I went through personally. But I certainly wasn't prevented from using a 401k. I just had a dollar limit that was a less than the maximum available to non-HCEs. The awkward thing was that HR didn't seen to be able to tell me in advance any firm value for the number of dollars. But it wasn't boom! surprise! you're an HCE, no 401(k) for you. It was boom! surprise! paperwork and taxes I hadn't expected to have to pay.
Ok you have some experience with this so perhaps it's less scary than I imagine. But going from being able to put 19,000 for myself or 50,000+ company match for my wife down to being able to put 4-6k is kind of like "Boom! No 401k" to me.

Granted I have a 457b plan so I don't even know if it applies to me.

And perhaps my wife's company has a "safe harbor" plan that I am in aware of and we are both exempt from this and I made much to do about nothing.
I am not an expert, but did have experience with this for a number of years when i was working.

The HCE test cut-off, based on my experience is NOT a cliff like you are imagining. The rules are quite complicated. But the general goal of the rules is make sure the plans are not loaded to benefit HCEs. One of the rules is that the percentage of salary contributions allowed by HCEs can not exceed the percentage of salary actually contributed by non-HCEs (there may be a scale factor applied to the percentages). That is why the actual amount allowed is not known ahead of time. So, let's say your plan allows 20% contribution, and you as an HCE do the full 20%. But, it turns out at the end of the year, the average non-HCE only contributed 15%. In that case (assuming scale factor is 1), you would be capped at 15%, and the other 5% would be returned to you.

Before retiring, I worked for a company that had a pretty generous 401k, they matched 100% of contributions up to 10% of salary. So, for a $54k limit, I would contribute $27k, and the company would match $27k. Despite this generous match, some years we would get a small portion of it back because the non-HCE contribution percentage was lower. It was never a significant drop. But, that may be different for different plans.

So, unless the non-HCEs in your company contribute very little to the 401K, it is unlikely you will experience a cliff like drop in allowed contributions.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: highly compensated employee (HCE) Time bomb?

Post by stocknoob4111 » Wed Oct 09, 2019 2:21 pm

I am an HCE and it has affected me intermittently... last year I got a refund of $5,000 back from my 401k contribution, this year it was way better as I was refunded only $900. Both situations I maxed out my 401k for that year. My company does not offer a Safe Harbor but I have the option to find something else. I may also move from California to a lower COL and tax state since my portfolio is growing larger and generating more dividends which CA taxes very heavily so moving becomes more attractive.

As for fairness, I will withhold comments as that type of discussion is not permitted on this forum but I will say this much that I am grateful that I am in a situation to be considered a HCE than be poor and have no money so better to look at the bright side :)

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Re: highly compensated employee (HCE) Time bomb?

Post by SRenaeP » Wed Oct 09, 2019 2:24 pm

CnC wrote:
Wed Oct 09, 2019 12:59 pm
retiredjg wrote:
Wed Oct 09, 2019 10:14 am
CnC wrote:
Wed Oct 09, 2019 9:11 am
If I'm a diligent saver maxing my 457 out at (currently) under 100k and in a few years I break 120k (or 130k due to inflation) my ability to drop to next to nothing since my employer's 457 plan had moderately high fees and no match so very little participation. Is this correct?
This does not seem to be a sentence. Some word is missing somewhere and I have no idea what the question is. Can you try again? :happy


Is a 457 plan even subject to HCE considerations?
If I wrote it unclear or incorrect I apologise.

I wanted to verify that if I am currently maxing my contributions (19k) at around 20% contributions and my employer has around 2% employee contributions average. This is generous over half the people do not contribute.

If I get a few pay increases and pass the 120k threshold I will be locked into only 2-4% and decrease my maximum contributions by ±$15,000 from the year before I became a HCE.
Is this correct?


Likewise, my wife's $56,000 tax advantaged money could be cut by $45,000-$50,000 if she passes the magical 20% and becomes designated as a HCE.
Is this correct?
No one but your company can answer that and it can/will vary from year to year. I will say at my company (a megacorp), I did not become an HCE right at $120k. It was at a salary higher than that. Also, there was one year that I was HCE but the next year I wasn't then the next (third) year, I was HCE again.

That said, at the time I first became HCE, the company allowed 25% 401k contributions. One year, HCEs were limited to 16% and another year, they were limited to 19%. In each case, I could still max out my 401k despite being HCE.

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Re: highly compensated employee (HCE) Time bomb?

Post by CnC » Wed Oct 09, 2019 2:38 pm

marcopolo wrote:
Wed Oct 09, 2019 2:11 pm
CnC wrote:
Wed Oct 09, 2019 1:03 pm
nisiprius wrote:
Wed Oct 09, 2019 12:58 pm
jebmke wrote:
Wed Oct 09, 2019 11:01 am
...If you pass 2? Or more of these you are in essence prevented from using a 401k to save for retirement...
I'm not an expert, all I know is what I went through personally. But I certainly wasn't prevented from using a 401k. I just had a dollar limit that was a less than the maximum available to non-HCEs. The awkward thing was that HR didn't seen to be able to tell me in advance any firm value for the number of dollars. But it wasn't boom! surprise! you're an HCE, no 401(k) for you. It was boom! surprise! paperwork and taxes I hadn't expected to have to pay.
Ok you have some experience with this so perhaps it's less scary than I imagine. But going from being able to put 19,000 for myself or 50,000+ company match for my wife down to being able to put 4-6k is kind of like "Boom! No 401k" to me.

Granted I have a 457b plan so I don't even know if it applies to me.

And perhaps my wife's company has a "safe harbor" plan that I am in aware of and we are both exempt from this and I made much to do about nothing.
I am not an expert, but did have experience with this for a number of years when i was working.

The HCE test cut-off, based on my experience is NOT a cliff like you are imagining. The rules are quite complicated. But the general goal of the rules is make sure the plans are not loaded to benefit HCEs. One of the rules is that the percentage of salary contributions allowed by HCEs can not exceed the percentage of salary actually contributed by non-HCEs (there may be a scale factor applied to the percentages). That is why the actual amount allowed is not known ahead of time. So, let's say your plan allows 20% contribution, and you as an HCE do the full 20%. But, it turns out at the end of the year, the average non-HCE only contributed 15%. In that case (assuming scale factor is 1), you would be capped at 15%, and the other 5% would be returned to you.

Before retiring, I worked for a company that had a pretty generous 401k, they matched 100% of contributions up to 10% of salary. So, for a $54k limit, I would contribute $27k, and the company would match $27k. Despite this generous match, some years we would get a small portion of it back because the non-HCE contribution percentage was lower. It was never a significant drop. But, that may be different for different plans.

So, unless the non-HCEs in your company contribute very little to the 401K, it is unlikely you will experience a cliff like drop in allowed contributions.
I understand most of that, I don't have any idea how one could even guess the average employee contributes.

But based off of conversations I have had with fellow employees at my place of work I imagine less than 30% contribute anything and I believe out of the ±200 people working here under 5 max out their contributions at 19k. The only reason I know this was the absolute shock our HR rep reacted to my withholding paperwork.

I also belong to a 457b plan not a 401k so I am not sure if HCE is even a thing for me.


Likewise as I mentioned my wife contributes a very high portion of her income. Her employer covers hundreds of thousands of people from multiple millions for executives to $10-15 an hour for retail. I would have to assume the average person puts less than 6% in their 401k. So 40% to 6% would be quite a cliff.

I already know I can't talk to my HR department because I had to explain to them what an expense ratio was, but does anyone have any examples of questions I can suggest to my wife to ask.

This would be a big factor in her choosing to accept a promotion requiring relocation. If it's a suffient raise but eliminates most of our tax advantaged savings it certainly won't be as attractive as a raise with the current status quo. We wouldn't want to pull the trigger on accepting a promotion and possible relocation only to find out the next year we had to give most of the raise back due to losing tax benefits. That is why I was hoping to figure out some way to get out ahead of it.

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Re: highly compensated employee (HCE) Time bomb?

Post by Spirit Rider » Wed Oct 09, 2019 2:42 pm

There have been a lot of misunderstanding and misinformation in this thread. I am starting with the OP.
CnC wrote:
Wed Oct 09, 2019 9:11 am
If I'm a diligent saver maxing my 457 out at (currently) under 100k and in a few years I break 120k (or 130k due to inflation) my ability to drop to next to nothing since my employer's 457 plan had moderately high fees and no match so very little participation. Is this correct?
Governmental retirement plans are not subject to anti-discrimination rules. You have nothing to worry about
My wife works at super mega Corp and for the first time made more than 120k last year. We haven't been told anything about HCE so I'm assuming she doesn't qualify?
401k plans can use current or prior year testing. If the plan used the statutory HCE limit and she made >= $120K last year and her 401k plan used prior year testing, she would not have been an HCE for the 2018 plan year, but will likely be for this year. Even if she is an HCE, there may be no consequence. If the plan is a safe harbor 401k plan, there is no ADP testing for employee deferrals, no ACP testing for employer contributions and no negative consequences for HCEs. If the plan is not a safe harbor, but passes ADP/ACP testing, there is no consequence for HCEs.
My wife's employer allows for after tax contributions and in service roll overs so we are currently able to save the maximum 56k between Roth roll overs company match and pre-tax 401k.
Even in a safe harbor plan, ACP testing is required for employee after-tax contributions. It is possible that a portion of both your her employee deferrals and employee after-tax contributions will be returned to her with earnings early next year. It will be a bit of a mess to clean up if the employee after-tax contributions and earnings are already in an IRA.
Do we run the risk of her breaking into the top 20% in the next promotion or two and then going from ±40% combined saving rate down to ±6? does anyone have any suggestions on how my wife could talk to her employer to see where that magical top 20% of earners line is?
The HCE statutory limit or the top 20% of compensation limit are mutually exclusive options that the 401k plan must make before the plan year. So first you need to determine if the plan uses the HCE statutory limit or the top 20% of compensation limit.
Correct me if I am wrong but that bump into becoming a HCE actually is a huge penalty and unless you continue to get substantial races from that point you are better off financially not getting any raises and staying under that amount staying under that amount.
That is like saying you should forgo more money if it is taxed at 50%. You are still netting the extra money. Just like tax deferral is a tax benefit, but having more money and investing in tax efficient investments in taxable accounts is not the worst thing.

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Re: highly compensated employee (HCE) Time bomb?

Post by Artful Dodger » Wed Oct 09, 2019 2:52 pm

nisiprius wrote:
Wed Oct 09, 2019 9:55 am
Well, yeah, this happens when you work for a stingy company that doesn't make a decent 401(k) match. It's just something to be aware of when evaluating a job opportunity. If the 401(k) match is stingy, then not only are you getting less money, but also there is a chance of HCE's running into problems.

But the good thing is, the higher-ups who set policy are almost certainly HCE's and thus are in the same boat, and if they don't want this problem themselves, they have to do something to get the participation up.

How bad it is depends on what the IRS determines to have been an "excess contribution." When it happened to me, it wasn't any "time bomb," just a nuisance. I was just told I'd overcontributed, got a check in the mail, for something like $318, returning my overcontribution. Since, of course, I'd already filed taxes, not paying taxes on money contributed to the 401(k), I had to recalculate and pay taxes on that $318. It was a nuisance because of the time delays. It two years to get the taxes straightened out. You don't know that you're overcontributing in year X. In year X+1 the calculations get made, the IRS tells the 401(k) plan manager, the 401(k) manager sends out the notices and the checks, which--being year X+1 income--end up going on your tax return for year X+2.

Remember that the whole 401(k) thing was never really designed, it just happened. A clever consultant saw an obscure tax regulation that wasn't intended to be a retirement plan, and made it one. Then businesses adopted it enthusiastically, because it was much cheaper and easier for the business than traditional defined-benefit pensions.

The rules are in place to insure that the 401(k) plan is being run in good faith as a retirement plan for everyone, not just a perk for a handful of higher-ups.

It's not "a huge penalty," it's just the taxes on the amount you overcontributed. If you have an idea that it's a problem, don't max out your 401(k) contributions. When it happened to me, I got back a check for something like $318 that I'd over contributed, so I just cut down my 401(k) contributions by something like $500 or $600 (extra for Kentucky windage) and it didn't happen again. And it doesn't come on suddenly, all-or-nothing. If participation is slightly too small, then HCEs can still contribute, they just can't contribute the plan maximum.

It's my opinion that it is always better to get raises.
How does one plan their investing for retirement around a question as giant as this?
You can't plan for everything. Stuff happens. And even when you think you can plan, "man plans, and God laughs." You can work yourself into a swivet digging into IRS regulations, but the crucial uncertainty here isn't the tax code, it's about future decisions your company's upper management might make about the 401(k) plan.
As I recall, when I worked for a corporation, and had a 401k, there were a few years when I was considered a HCE. As noted above I was notified by my company, and as this was determined mid year via their audit, my future contributions were decreased so they could pass their non-discrimination testing. The upshot was that they eventually doubled their match and did an auto enrollment to increase the participation and overall contribution levels of the non-HCEs, and I was back in the maxing out game. So no, not really a time bomb.

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Re: highly compensated employee (HCE) Time bomb?

Post by anon_investor » Wed Oct 09, 2019 2:56 pm

The amount the OP's wife may or may not be able to contribute to her 401k, even if classified as a HCE, is really going to be dependent on the other participants in that plan. For example, I am at a mega corp and a HCE, I am not prevented from contributing the full $19k, and I can even contribute some after-tax (and convert to Roth) for the mega backdoor door Roth 401k. I am prevented from contributing up to the $56k limit, but I am still able to contribute a decent amount after-tax. I wish I could contribute more annually to the mega backdoor Roth, but it is not the end of the world, I just put the excess in tax efficient index funds (e.g. VTSAX - Vanguard's total U.S. stock market index fund) in my taxable account. With a mega corp 401k, there is a higher chance that your wife would not be as limited than someone with a 401k at a smaller company.

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Re: highly compensated employee (HCE) Time bomb?

Post by HomeStretch » Wed Oct 09, 2019 2:59 pm

CnC wrote:
Wed Oct 09, 2019 2:38 pm
This would be a big factor in her choosing to accept a promotion requiring relocation. If it's a suffient raise but eliminates most of our tax advantaged savings it certainly won't be as attractive as a raise with the current status quo. We wouldn't want to pull the trigger on accepting a promotion and possible relocation only to find out the next year we had to give most of the raise back due to losing tax benefits. That is why I was hoping to figure out some way to get out ahead of it.
From your past posts I can see you put a lot of good thought and time into your finances. But you might be overthinking this. Your wife should not let the possibility of losing pretax 401k space as a HCE limit her career and pay advancement by turning down a promotion if the promo/relocation otherwise make sense.

This is truly a high-class problem. If impacted, you will be fine financially as you can save the money in a Taxable account rather than the 401k. Best of luck with the relocation decision.

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Re: highly compensated employee (HCE) Time bomb?

Post by diy60 » Wed Oct 09, 2019 3:09 pm

CnC wrote:
Wed Oct 09, 2019 9:11 am
Do we run the risk of her breaking into the top 20% in the next promotion or two and then going from ±40% combined saving rate down to ±6? does anyone have any suggestions on how my wife could talk to her employer to see where that magical top 20% of earners line is?

Correct me if I am wrong but that bump into becoming a HCE actually is a huge penalty and unless you continue to get substantial races from that point you are better off financially not getting any raises and staying under that amount staying under that amount.
You may be jumping the gun. MegaCorp I retired from HCEs were very well compensated. Between RSU grants at 50% of salary, deferred compensation plan, and a different defined benefit plan, HCE total compensation dwarfed any reduction in 401K contributions. You should be celebrating the fruits of your hard work.

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Re: highly compensated employee (HCE) Time bomb?

Post by CnC » Wed Oct 09, 2019 3:26 pm

Spirit Rider wrote:
Wed Oct 09, 2019 2:42 pm
There have been a lot of misunderstanding and misinformation in this thread. I am starting with the OP.
CnC wrote:
Wed Oct 09, 2019 9:11 am
If I'm a diligent saver maxing my 457 out at (currently) under 100k and in a few years I break 120k (or 130k due to inflation) my ability to drop to next to nothing since my employer's 457 plan had moderately high fees and no match so very little participation. Is this correct?
Governmental retirement plans are not subject to anti-discrimination rules. You have nothing to worry about
My wife works at super mega Corp and for the first time made more than 120k last year. We haven't been told anything about HCE so I'm assuming she doesn't qualify?
401k plans can use current or prior year testing. If the plan used the statutory HCE limit and she made >= $120K last year and her 401k plan used prior year testing, she would not have been an HCE for the 2018 plan year, but will likely be for this year. Even if she is an HCE, there may be no consequence. If the plan is a safe harbor 401k plan, there is no ADP testing for employee deferrals, no ACP testing for employer contributions and no negative consequences for HCEs. If the plan is not a safe harbor, but passes ADP/ACP testing, there is no consequence for HCEs.
My wife's employer allows for after tax contributions and in service roll overs so we are currently able to save the maximum 56k between Roth roll overs company match and pre-tax 401k.
Even in a safe harbor plan, ACP testing is required for employee after-tax contributions. It is possible that a portion of both your her employee deferrals and employee after-tax contributions will be returned to her with earnings early next year. It will be a bit of a mess to clean up if the employee after-tax contributions and earnings are already in an IRA.
Do we run the risk of her breaking into the top 20% in the next promotion or two and then going from ±40% combined saving rate down to ±6? does anyone have any suggestions on how my wife could talk to her employer to see where that magical top 20% of earners line is?
The HCE statutory limit or the top 20% of compensation limit are mutually exclusive options that the 401k plan must make before the plan year. So first you need to determine if the plan uses the HCE statutory limit or the top 20% of compensation limit.
Correct me if I am wrong but that bump into becoming a HCE actually is a huge penalty and unless you continue to get substantial races from that point you are better off financially not getting any raises and staying under that amount staying under that amount.
That is like saying you should forgo more money if it is taxed at 50%. You are still netting the extra money. Just like tax deferral is a tax benefit, but having more money and investing in tax efficient investments in taxable accounts is not the worst thing.


Thank you Spirit Rider you helped.

I was being a bit excessive talking about forgoing raises. What I was actually talking about was accepting a promotion that requires more time and effort but comes with a sufficient raise for the extra work. But being blind sided by finding out that the promotion ends up costing ±$40,000 in Roth investments per year. Sure the promotion would add money to your gross but an extra dollar in our brokerage is not worth an extra dollar in our Roth IRA.

Would you mind explaining "The HCE statutory limit or the top 20% of compensation limit are mutually exclusive options that the 401k plan must make before the plan year. So first you need to determine if the plan uses the HCE statutory limit or the top 20% of compensation limit."

Does this mean that some plans use $120k rather than 20% and some plans use top 20% rather than $120k meaning you could be a HCE even if you don't make over 120k?

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Re: highly compensated employee (HCE) Time bomb?

Post by CnC » Wed Oct 09, 2019 3:46 pm

So many replies, thank you for taking the time to straighten me out as much as possible on this.

So what it seems like I am being told is that this really is a complete shot in the dark. It's not really it ignore it because it's a first world problem or that I shouldn't plan ahead. It really is just that it can randomly kick in next year when she makes $140k or some promotion at $200k or anywhere in-between and there really is nothing that she / we can do to know ahead of time?

Once you cross the magic 120k a year line you never know when you will have a reduced 401k contribution limit.

Is this correct?

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Re: highly compensated employee (HCE) Time bomb?

Post by MA405 » Wed Oct 09, 2019 4:25 pm

In the past 5 years I was HCE, and maxing out 401K.
Our company failed the test each one of these years.
Every following year around February I would receive a check for over contributed amount from our 401k plan, minus tax. The amount varied from few hundred, to around $3.5K, I guess depending how badly we failed the test.
I would then immediately invest that returned amount into Roth, or into taxable if I somehow managed to fill Roth limit early.

So, yes, it's annoying, but it is not a big deal, at least it hasn't been for me. Not for a minute did I think to contribute less to 401K.

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Re: highly compensated employee (HCE) Time bomb?

Post by milktoast » Wed Oct 09, 2019 6:12 pm

CnC wrote:
Wed Oct 09, 2019 3:46 pm
So what it seems like I am being told is that this really is a complete shot in the dark.

It's not really it ignore it because it's a first world problem or that I shouldn't plan ahead. It really is just that it can randomly kick in next year when she makes $140k or some promotion at $200k or anywhere in-between and there really is nothing that she / we can do to know ahead of time?
The payroll dept absolutely knows the answer for the current year. And HR should be willing to get the answer for you. But nobody on the internet can guess. And payroll can't guess for next year.

If it's limited, ask them to consider adopting safe harbor plan.

Keep in mind that worst case is that you pay tax on the money prior to investing rather than when you withdraw it. Ignoring state tax, that's probably 24% bracket. So 24% of 19k is about $4500 in extra tax you have to pay now (and less tax you pay later). Or if you invest in Roth, you lose that space.

So when you get a raise to HCE, if the raise exceeds $4500 you are winning. So make sure they give you 10% raise with the new responsibilities and you will come out ahead. Guaranteed.

Don't stress this so hard.

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Re: highly compensated employee (HCE) Time bomb?

Post by Spirit Rider » Wed Oct 09, 2019 6:52 pm

CnC wrote:
Wed Oct 09, 2019 9:35 am
All that I have been able to locate is 120k is a hard cutoff. 5% of the company is a hard cutoff and top 20% is a hard cutoff.

If you pass 2? Or more of these you are in essence prevented from using a 401k to save for retirement.
If you are a > 5% owner including through family attribution, you are considered an HCE regardless of income. Neither of the other two limits apply. As I said in a previous post the other two options are mutual exclusive plan elections.
Let's forget about fairness and go into logistics then. Once you call into the hce pit are you just done with 401k's? Is there anything that can be done to avoid this cliff other than refusing a raise or a promotion? My wife's example of saving 56k tax advantaged at top 21% of her company to being limited to saving ±8k is an enormous cost for a few thousand dollar raise.
No there is nothing you can do
How does one plan their investing for retirement around a question as giant as this?
You establish a retirement plan savings rate and shift to more taxable if necessary. As I said earlier tax efficient investments in a taxable account are not the worst thing.

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Re: highly compensated employee (HCE) Time bomb?

Post by Spirit Rider » Wed Oct 09, 2019 7:02 pm

rich126 wrote:
Wed Oct 09, 2019 9:46 am
I'm not sure of the details but I've been over that amount for a while and haven't encountered any issues. And there are more things involved than just what I copied above.
There is no ADP testing for employee deferrals and ACP testing for employer contributions in a safe harbor plan. Also, even if the plan is a non-safe harbor plan it can still pass the testing. In neither case will HCE contributions be limited.

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Re: highly compensated employee (HCE) Time bomb?

Post by Spirit Rider » Wed Oct 09, 2019 7:56 pm

Jack FFR1846 wrote:
Wed Oct 09, 2019 9:47 am
There is no specific $$ cutoff. I was limited at one company as a HCE when I made $75k a year. I was NOT limited nor cut off at 2 different companies where a year, I made over $200k a year. The difference is in the participation of lower wage workers. If everyone in the assembly areas of a factory contributes to a 401k, you'll likely be fine. This can be promoted by the company by providing a generous match. Where I was limited, there was no match and a lot of near minimum wage workers in the factory. There was no action needed on my part when I was limited. From memory, a limit was implemented and my contributions reduced with no input from me. It's not something that a worker can do anything about, nor should they.
As I replied to a similar post in another thread this is incorrect.

These limits are very specific in the tax code in determining HCE status. Average NHCE and HCE contributions and lower income participation rates have absolutely nothing to do with HCE status. The only thing they determine is how much if any of an HCE contributions are limited.

There only way you were classified as an HCE with $75K in compensation was if you were a 5% owner or it was 1987 (The HCE limit was $75K in 1987). It was much more likely that all employees were restricted to a contribution percentage that on $75K in compensation prevented you from reaching the employee deferral limit.

If you made over $200K/year and were not limited it was; a governmental plan (no anti-discrimination requirements), a safe harbor 401k plan or the plan was very top heavy and the plan elected to use the top 20% of compensation. I'm guessing it was one of the first two.

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Re: highly compensated employee (HCE) Time bomb?

Post by Spirit Rider » Wed Oct 09, 2019 8:10 pm

CnC wrote:
Wed Oct 09, 2019 3:26 pm
Does this mean that some plans use $120k rather than 20% and some plans use top 20% rather than $120k meaning you could be a HCE even if you don't make over 120k?
Yes, it is a choice by the plan.

It would take a very stupid company/plan that would select the 20% of compensation option if it meant that the calculated HCE limit would be below the statutory limit. It is certainly possible, but I have never heard of a company/plan doing it. The who reason of the top 20% of compensation limit is to increase the HCE limit so that it applies to less people.

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Re: highly compensated employee (HCE) Time bomb?

Post by Iorek » Wed Oct 09, 2019 9:06 pm

Aren't there safe harbors that are relatively easy to satisfy for a company willing to offer a match? I did get dinged by this one year, but it's not by any means inevitable at every company.

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Re: highly compensated employee (HCE) Time bomb?

Post by firebirdparts » Wed Oct 09, 2019 9:20 pm

II've never even heard of any of this. So it's not inevitable by any means.

You have me curious now, I'll look at some of the plan details tomorrow.
A fool and your money are soon partners

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Re: highly compensated employee (HCE) Time bomb?

Post by david3213 » Wed Oct 09, 2019 10:48 pm

CnC wrote:
Wed Oct 09, 2019 9:11 am
My wife's employer allows for after tax contributions and in service roll overs so we are currently able to save the maximum 56k between Roth roll overs company match and pre-tax 401k.
How did you come up with 56k? Is this combined between the two of you? I thought the limit was 19k per person plus 6k catch up if you're a certain age. For two people who are old enough to get catch-up contributions, that's 50k total (19+19+6+6).

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Re: highly compensated employee (HCE) Time bomb?

Post by CnC » Wed Oct 09, 2019 10:55 pm

david3213 wrote:
Wed Oct 09, 2019 10:48 pm
CnC wrote:
Wed Oct 09, 2019 9:11 am
My wife's employer allows for after tax contributions and in service roll overs so we are currently able to save the maximum 56k between Roth roll overs company match and pre-tax 401k.
How did you come up with 56k? Is this combined between the two of you? I thought the limit was 19k per person plus 6k catch up if you're a certain age. For two people who are old enough to get catch-up contributions, that's 50k total (19+19+6+6).
This is atleast an easy one.

Per the IRS
https://www.irs.gov/retirement-plans/40 ... nual-limit

total employee and employer contributions (including forfeitures) - the lesser of 100% of an employee’s compensation or $56,000 for 2019

The first 19k are tax deferred the rest is company match as well as after tax contributions rolled into her Roth IRA.

SRenaeP
Posts: 948
Joined: Tue Jan 19, 2010 9:05 pm

Re: highly compensated employee (HCE) Time bomb?

Post by SRenaeP » Thu Oct 10, 2019 7:21 am

milktoast wrote:
Wed Oct 09, 2019 6:12 pm
CnC wrote:
Wed Oct 09, 2019 3:46 pm
So what it seems like I am being told is that this really is a complete shot in the dark.

It's not really it ignore it because it's a first world problem or that I shouldn't plan ahead. It really is just that it can randomly kick in next year when she makes $140k or some promotion at $200k or anywhere in-between and there really is nothing that she / we can do to know ahead of time?
The payroll dept absolutely knows the answer for the current year. And HR should be willing to get the answer for you. But nobody on the internet can guess. And payroll can't guess for next year.

If it's limited, ask them to consider adopting safe harbor plan.

Keep in mind that worst case is that you pay tax on the money prior to investing rather than when you withdraw it. Ignoring state tax, that's probably 24% bracket. So 24% of 19k is about $4500 in extra tax you have to pay now (and less tax you pay later). Or if you invest in Roth, you lose that space.

So when you get a raise to HCE, if the raise exceeds $4500 you are winning. So make sure they give you 10% raise with the new responsibilities and you will come out ahead. Guaranteed.

Don't stress this so hard.
Payroll can guess for next year. I've been surprised to hear the multiple instances when people just had money returned to them after the fact. At my Megacorp, we get an email in Oct/Nov informing us that we'll be HCE for the next year and that contributions will be limited. Then, they coordinate with the 401k provider to cap your contributions regardless of what you specified (e.g. you opted for 20% but HCEs are limited to 19%, 19% is all that comes out). That said, I assume they redo their calculations in the new year because one year I got an email in Jan/Feb that said I wasn't HCE after all and my contributions would be restored to the original non-capped percentage.

diy60
Posts: 299
Joined: Wed Sep 07, 2016 6:54 pm

Re: highly compensated employee (HCE) Time bomb?

Post by diy60 » Thu Oct 10, 2019 7:44 am

david3213 wrote:
Wed Oct 09, 2019 10:48 pm
CnC wrote:
Wed Oct 09, 2019 9:11 am
My wife's employer allows for after tax contributions and in service roll overs so we are currently able to save the maximum 56k between Roth roll overs company match and pre-tax 401k.
How did you come up with 56k? Is this combined between the two of you? I thought the limit was 19k per person plus 6k catch up if you're a certain age. For two people who are old enough to get catch-up contributions, that's 50k total (19+19+6+6).
401K after tax sub account, you should check if your employer has this feature. It's golden. Along with an IRR feature it allows one to super charge your Roth holdings.

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