Author Topic: Question re: large upcoming bonus and effects of me becoming a HCE for 401k  (Read 621 times)

Nick_Miller

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It's not a done deal, but I am looking at a potential $30,000 bonus this fall for settling a huge case.

Yes, it is awesome. I am very excited.

But it will also push me WELL into HCE status (without the bonus, I'm on pace to gross around $105K-110K for this year).

So I have two options:

1) Take the bonus this fall and just lump being a HCE next year for the 401k. But with us being a small office, any 401k contribution I would make next year would almost certainly result in the plan failing the non-discrimination test and causing lots of headaches for my boss. I'm not even sure I'd be able to make a contribution at all next year without that happening. Currently, only two support staff people contribute, and it's much less than I contribute.

2) Take only $5K to $10K of the bonus this year, and then roll the rest to January. I might still end up making HCE-level money for 2019, but it would buy me another year of being able to make 401k contributions without screwing up the office's 401k plan.

I know it's always risky deferring compensation, but I'm sure my boss would agree to something in writing that would be enforceable in the event I became separated from work between now and January. My bigger worry would be that my boss might not be disciplined enough to let $20K "sit on the side" in one of his accounts for months, so that when January rolls around, he's like "Nick, about that bonus. We ended up having some additional expenses...would you be okay if I paid it out a few thousand dollars each month through all of 2019?"

Any thoughts?
« Last Edit: September 04, 2018, 09:35:23 AM by Nick_Miller »

Novik

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Re: Question re: large upcoming bonus and effects of me becoming a HCE for 401k
« Reply #1 on: September 04, 2018, 10:03:42 AM »
This whole 401k limit and HCE thing is fascinating to me as a Canadain, so I went and read this seemingly comprehensive summary: https://www.goodfinancialcents.com/401k-limits-for-highly-compensated-employees/.

The easiest way out of this predicament seems to be if you stopped having to worry about these HCE tests... by either getting more support staff to contribute more, or by making the 401k plan a "safe harbour plan". Any chance of talking your boss into either, or taking the lead yourself there?

Assuming no, my instinct is to get the $$ now, but logically I think deferring is better for you. To figure out if it's worth the risk, I'd do the math on final takehome income this year and next between the worst case scenarios of "can't contribute next year to a 401k" and "don't get the remaining bonus money ever*".    (*and maybe a 3rd scenario of getting it slowly)