Author Topic: Classified as Highly Compensated employee and slapped with a 401k cap?!?!  (Read 1221 times)

bengbark

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Apparently I make too much money now and am capped at 13k 401k contributions yearly by my company! Found out the hard way by hitting it thinking there was some mistake.

Has anyone experienced this or have any advice? I already max out HSA, IRA. Can I contribute the rest ($5k) as a Roth 401k? Do I have to switch companies I work for to get around this?

Thanks!

seattlecyclone

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Re: Classified as Highly Compensated employee and slapped with a 401k cap?!?!
« Reply #1 on: November 16, 2017, 02:31:53 PM »
A Highly Compensated Employee (HCE) is defined as someone who earns at least $120k and is in the top 20% of their company by compensation. The 401(k) laws require that HCEs not contribute much more to the 401(k) plan as a percentage of income, on average, than non-HCEs do. There are a few things that companies can do to make this happen:

1) Restrict the amount that HCEs can contribute.
2) Increase employer contributions for non-HCEs to a high enough level that would allow HCEs to contribute more.
3) Convince non-HCEs to voluntarily increase their savings rate.

Sounds like your employer has chosen Option 1. You will not be able to contribute the extra $5k this year whether it's in traditional or Roth. For future years, you can try to lobby for Options 2 or 3, ask for a pay cut so you're not an HCE anymore, or switch companies.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

Mr Griz

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Re: Classified as Highly Compensated employee and slapped with a 401k cap?!?!
« Reply #2 on: November 16, 2017, 07:38:38 PM »
Iím in this situation with Megacorp. Fortunately they offer a ďnon-qualified supplemental savings planĒ which picks up when I max out the 401k. The ďnon-qualifiedĒ part basically means it canít be rolled over into another tax deferred plan (e.g. IRA) when I leave the company. I end up putting a lot more into the NQSSP than the regular 401k. I have to start taking distributions when I retire and I set it up to pay out over 10 years which will bridge me to RMDs & SS. Pretty good deal actually.

Hargrove

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Re: Classified as Highly Compensated employee and slapped with a 401k cap?!?!
« Reply #3 on: November 16, 2017, 09:37:59 PM »
The easiest way out of this is actually also a very good policy.

Sometimes HCEs are merely the top 20% of a company's earners. Large sales forces can hit this because their support staff put them all into the top 20%. However, you can reduce the difference between yourself and the rest of the staff by getting them involved, and the best way to do that is to talk to your HR about having the "default" enrollment on the 401k include a contribution percentage. All too often, the default enrollment is 0%.

If everybody is enrolled, the cap on your contributions goes up, and everybody saves money.

I'm arbitrarily capped at 10% - in my case, HR kicked the can down the road until I stopped asking. Oh well.

Paul der Krake

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Re: Classified as Highly Compensated employee and slapped with a 401k cap?!?!
« Reply #4 on: November 16, 2017, 09:55:42 PM »
A Highly Compensated Employee (HCE) is defined as someone who earns at least $120k and is in the top 20% of their company by compensation. The 401(k) laws require that HCEs not contribute much more to the 401(k) plan as a percentage of income, on average, than non-HCEs do. There are a few things that companies can do to make this happen:

1) Restrict the amount that HCEs can contribute.
2) Increase employer contributions for non-HCEs to a high enough level that would allow HCEs to contribute more.
3) Convince non-HCEs to voluntarily increase their savings rate.
4) Let employees contribute the max, then at tax season determine by how much the company has run afoul of the HCE rules, issue refund checks that are impossible to accurately predict and require an extra tax form.

:sadpanda:

simonsez

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Re: Classified as Highly Compensated employee and slapped with a 401k cap?!?!
« Reply #5 on: November 17, 2017, 07:27:11 AM »
There are a few things that companies can do to make this happen:
1) Restrict the amount that HCEs can contribute.
2) Increase employer contributions for non-HCEs to a high enough level that would allow HCEs to contribute more.
3) Convince non-HCEs to voluntarily increase their savings rate.
OP, I think option 2 could be your best bet.  Here is some pasted info on safe harbor plans.

 "To avoid non-discrimination testing, your business will need to contribute to both your 401(k) account and your employees' accounts. Companies that choose a Safe Harbor plan must either:

    Make a dollar-for-dollar matching contribution for all participating employees, on the first 4% of each employee's compensation (this is the most popular option), OR
    Contribute 3% of the employee's compensation for each eligible employee, regardless of whether the employee chooses to participate in the plan."

SaucyAussie

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Re: Classified as Highly Compensated employee and slapped with a 401k cap?!?!
« Reply #6 on: November 17, 2017, 01:26:24 PM »
I must be on the bubble at my company because some years I am an HCE and some years I am not.  I am capped at 15% which still allows me to hit 18K as long as I contribute close to 15% all year.

I got caught out this year, I planned to backload my 401K once my SS tax maxed out.  Unfortunately my pay raise in August pushed me into HCE land and now I'm gonna end up being short.  Lesson learned.

I'm am most concerned about not being able to make catch-up contributions when I turn 50.  I will just have to retire before then.

bridget

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Re: Classified as Highly Compensated employee and slapped with a 401k cap?!?!
« Reply #7 on: November 17, 2017, 01:56:27 PM »
...

1) Restrict the amount that HCEs can contribute.
2) Increase employer contributions for non-HCEs to a high enough level that would allow HCEs to contribute more.
3) Convince non-HCEs to voluntarily increase their savings rate.

...

This is why my law firm contributes a full 10% of staff salary to staff 401(k)s, and 0% for lawyers.  When I first heard of it, I thought it was just insanely generous for the staff, but then I read about the HCE rule, and realized that they want to make it so that the lawyers (some making multiple millions of dollars per year) could still contribute to their 401(k)s, too. 

Bojack

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Re: Classified as Highly Compensated employee and slapped with a 401k cap?!?!
« Reply #8 on: November 19, 2017, 07:09:56 PM »
...

1) Restrict the amount that HCEs can contribute.
2) Increase employer contributions for non-HCEs to a high enough level that would allow HCEs to contribute more.
3) Convince non-HCEs to voluntarily increase their savings rate.

...

This is why my law firm contributes a full 10% of staff salary to staff 401(k)s, and 0% for lawyers.  When I first heard of it, I thought it was just insanely generous for the staff, but then I read about the HCE rule, and realized that they want to make it so that the lawyers (some making multiple millions of dollars per year) could still contribute to their 401(k)s, too.

Are you sure it isn't just non-partner attorneys who get 0%? It's a common plan design to give partners/staff a profit sharing contribution, and give 0% to the associates. I've never seen partners get 0%.

bridget

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Re: Classified as Highly Compensated employee and slapped with a 401k cap?!?!
« Reply #9 on: November 19, 2017, 07:16:15 PM »
...

1) Restrict the amount that HCEs can contribute.
2) Increase employer contributions for non-HCEs to a high enough level that would allow HCEs to contribute more.
3) Convince non-HCEs to voluntarily increase their savings rate.

...

This is why my law firm contributes a full 10% of staff salary to staff 401(k)s, and 0% for lawyers.  When I first heard of it, I thought it was just insanely generous for the staff, but then I read about the HCE rule, and realized that they want to make it so that the lawyers (some making multiple millions of dollars per year) could still contribute to their 401(k)s, too.

Are you sure it isn't just non-partner attorneys who get 0%? It's a common plan design to give partners/staff a profit sharing contribution, and give 0% to the associates. I've never seen partners get 0%.

Maybe; itís certainly possible. Mainly I meant that the 10% is the reason for the very high 10% contribution (I donít even think itís a match, just a straight contribution).

Jesstache

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Re: Classified as Highly Compensated employee and slapped with a 401k cap?!?!
« Reply #10 on: November 19, 2017, 08:02:02 PM »

I'm am most concerned about not being able to make catch-up contributions when I turn 50.  I will just have to retire before then.

My husband is turning 50 next year and is in HCE category so I've done research on this and the catch up contribution is on top of your HCE limit. 

A Highly Compensated Employee (HCE) is defined as someone who earns at least $120k and is in the top 20% of their company by compensation. The 401(k) laws require that HCEs not contribute much more to the 401(k) plan as a percentage of income, on average, than non-HCEs do. There are a few things that companies can do to make this happen:

1) Restrict the amount that HCEs can contribute.
2) Increase employer contributions for non-HCEs to a high enough level that would allow HCEs to contribute more.
3) Convince non-HCEs to voluntarily increase their savings rate.
4) Let employees contribute the max, then at tax season determine by how much the company has run afoul of the HCE rules, issue refund checks that are impossible to accurately predict and require an extra tax form.

:sadpanda:

This is exactly the route my husband's company takes.  It's annoying but we're just used to it at this point.  Every year he contributes the limit and then some time in Feb/March, we get a refund check that counts as regular taxable income for the year we receive it.  It's happened for the past 5 years he's been at his company but they keep hiring more people and each year the refund has become smaller.  It was "only" $2k-ish last year, when 5 years ago it was more like $7k (ouch).  Unfortunately, we are also above all other tax advantaged contribution income limits (Roth, Spousal IRA, etc) so it either has to go toward taxable savings or in our case, it's a mortgage pay down bonus.

You could ask for a raise of the equivalent amount of taxes you aren't able to defer on the refund amount and then just invest the same amount after tax as you'd have been able to invest pre-tax but now your company is basically picking up the tax bill :).  After all, that's really the only difference.  It's not like you can't still invest it, it's just not pre-tax dollars.

Goldielocks

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Re: Classified as Highly Compensated employee and slapped with a 401k cap?!?!
« Reply #11 on: November 19, 2017, 09:32:21 PM »
Some companies choose to outsource lower paid work to contracted groups to get around this too.   Not a recommended solution, but it does work if everyone earning under $40k per year is not actually an employee, and you contract with the HR company that provides and manages these workers.  Everyone remaining is a full time, mid-class or higher office employee, and thus, can justify higher company contributions and forced enrollment.

GettingClose

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Re: Classified as Highly Compensated employee and slapped with a 401k cap?!?!
« Reply #12 on: November 20, 2017, 04:51:45 PM »
I'm in this situation; very disheartening.  However, I now have a second job with a family member's business which basically pays the amount I can't contribute to my main employer's 401(k) - I just contribute it all to the second business's 401(k) and thus hit the max.   Unfortunately, this means I'm working more than I want to ...