A couple years ago I was classified as a HCE For whatever nondiscrimination tests are required for the dependent care FSA benefit. The benefits department notified me in late Dec 2018 that my 2019 DCFSA election of $5,000 would be reduced to $3,500.
I'm about to start doing mega backdoor Roth -- or at least trying to. I assume there are different HCE/NHCE tests applied to the retirement plans versus FSAs, and I recall reading that the participation rate of staff in the after-tax part of the plan is one of the tests. Basically if too few NHCE participate, or contribute too little relative to HCE, then the benefit may be deemed to be disproportionately favoring HCE and either reduced or not allowed for HCE.
I'm wondering if any of you have been in a situation where you had contributed to after-tax, rolled contributions out to your Roth IRA (and optionally earnings out to your Traditional IRA), and later in the year were determined to be HCE and had to unwind the whole thing due to a failed nondiscrimination test?
My understanding is that the employer would have to return the after-tax contributions (or some portion thereof) to the HCE's. I can't really wrap my mind around the logistics. What happens to any gain or loss in the IRA attributable to the rolled-over funds? Would the IRA administrator (Vanguard) be directed to "undo" the rollover, sending the rolled-in amount back to the employer to be returned to me, while the gain (or loss!) remains in the IRA?
