The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: bengbark on November 16, 2017, 02:18:18 PM
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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!
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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.
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I’m in this situation with Megacorp. Fortunately they offer a “non-qualified supplemental savings plan” which picks up when I max out the 401k. The “non-qualified” part basically means it can’t 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.
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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.
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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:
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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."
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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.
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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.
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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.
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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%.
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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; it’s certainly possible. Mainly I meant that the 10% is the reason for the very high 10% contribution (I don’t even think it’s a match, just a straight contribution).
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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.
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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.
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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 ...
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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."
am i understanding this post correctly? are you saying that by having a safe harbor plan, you bypass the HCE issue?
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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."
am i understanding this post correctly? are you saying that by having a safe harbor plan, you bypass the HCE issue?
Yes, that is my understanding of the rules.
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am i understanding this post correctly? are you saying that by having a safe harbor plan, you bypass the HCE issue?
That's the "safe harbor" in a safe harbor plan. You're safe from discrimination testing.
You can't allow the plan to accept after tax contributions (Mega Backdoor Roth) in a safe harbor plan [but you can have a Roth 401(k)], but since HCEs tend to be the people who want to do after tax contributions, it seems rather pointless for companies not to use a safe harbor plan if they are running into discrimination testing issues.
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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.
But the problem is, if HCE restrictions prevent you from reaching the regular annual max, you never make it to catch-up territory.
In my case, for 2020, I may reach the $19.5K maximum by the end of November, so I will have to make my entire $6500 catch up contribution from December paychecks.
This will by my first year, so not entirely sure of the mechanics.
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But the problem is, if HCE restrictions prevent you from reaching the regular annual max, you never make it to catch-up territory.
My understanding is that catch-up contributions come after limits, whether $19k elective deferral limit or (say) $3k HCE limit. Obviously, check with an expert, but the over-50 HCEs in my company can contribute $4k + $6k catch-up.
https://www.irs.gov/retirement-plans/401k-plan-catch-up-contribution-eligibility (https://www.irs.gov/retirement-plans/401k-plan-catch-up-contribution-eligibility)
A catch-up contribution is an elective deferral made by a participant age 50 or older that exceeds a statutory limit, a plan-imposed limit, or the actual deferral percentage (ADP) test limit for highly compensated employees (HCEs).
https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/2019-irs-401k-contribution-limits.aspx (https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/2019-irs-401k-contribution-limits.aspx)
In addition, most plans allow participants to start making catch-up contributions in the calendar year in which they reach age 50. Catch-up contributions are not included in ADP testing, and thus catch-up contributions "can be used to enable higher total contributions and, as necessary, to re-characterize contributions that would otherwise be returned to participants due to IRS limits," said Jack Towarnicky, executive director at Plan Sponsor Council of America, an employers group.
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But the problem is, if HCE restrictions prevent you from reaching the regular annual max, you never make it to catch-up territory.
My understanding is that catch-up contributions come after limits, whether $19k elective deferral limit or (say) $3k HCE limit. Obviously, check with an expert, but the over-50 HCEs in my company can contribute $4k + $6k catch-up.
Understood - and this may be only my company's policy - but I cannot make the catch up contribution until AFTER I have made the normal $19K contribution.
From the plan doc -
"Catch-Up Contributions can only be made after you reach the legal annual limit or the Plan limit on Participant contributions. "
It does seem quite unfair and a little pointless. For 2020, our company plan is switching from ADP to Fidelity so it will be interesting to see if any policies change.
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But the problem is, if HCE restrictions prevent you from reaching the regular annual max, you never make it to catch-up territory.
My understanding is that catch-up contributions come after limits, whether $19k elective deferral limit or (say) $3k HCE limit. Obviously, check with an expert, but the over-50 HCEs in my company can contribute $4k + $6k catch-up.
Understood - and this may be only my company's policy - but I cannot make the catch up contribution until AFTER I have made the normal $19K contribution.
From the plan doc -
"Catch-Up Contributions can only be made after you reach the legal annual limit or the Plan limit on Participant contributions. "
It does seem quite unfair and a little pointless. For 2020, our company plan is switching from ADP to Fidelity so it will be interesting to see if any policies change.
Uh, you are reaching the legal limit...
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But the problem is, if HCE restrictions prevent you from reaching the regular annual max, you never make it to catch-up territory.
My understanding is that catch-up contributions come after limits, whether $19k elective deferral limit or (say) $3k HCE limit. Obviously, check with an expert, but the over-50 HCEs in my company can contribute $4k + $6k catch-up.
Understood - and this may be only my company's policy - but I cannot make the catch up contribution until AFTER I have made the normal $19K contribution.
From the plan doc -
"Catch-Up Contributions can only be made after you reach the legal annual limit or the Plan limit on Participant contributions. "
It does seem quite unfair and a little pointless. For 2020, our company plan is switching from ADP to Fidelity so it will be interesting to see if any policies change.
Uh, you are reaching the legal limit...
Right. For me I reach the legal limit with 1 or 2 paychecks left in the year. So the entire catch up contribution would need to come out of those last paychecks. Some people may not ever reach the legal limit so never get to make the catch up contribution.
For example - let's say someone with a salary of 120K was classified by their company as HCE. They would be limited to contributing 1500/month, for a total of 18K. As they never reach the 19K legal limit, they would not be able to make the catch up contribution, according to the rule in my plan.