Up against HCE cap for 401K - weighing options - what would you do?

[Nick_Miller]

So on my salary alone, I am set to earn $124K by end of the year, and Highly Compensated Employee status kicks in at $125K, so I have no wiggle room at all.

I have already earned a $1500 bonus this year that I haven't accepted yet, and now for this month, I've earned another $3000 bonus. So that's $4500 so far, and I'd anticipate earning at least one more by the end of the year, so let's say a total of $6000.

Our 401K is VERY small, meaning just me and one other (lower paid) employee. If I hit HCE for 2019, that means for 2020 I would only be able to contribute about $2000 next year for my 401k, roughly matching what the other employee puts in. (I'm running exact numbers with our 401K contractor, but for sake of this discussion, assume I will be able to put hardly anything in my 401K next year if I hit HCE).

Changing our 401K is very unlikely to happen, so I'm focusing on options that I can control. What would you do in this situation? So far the following options come to mind...

1) Just take the bonus money now, knowing I won't be able to put hardly anything in 401k in 2020.

2) Defer the bonus money to 2020 to prevent hitting HCE this year.

3) Ask for non-$ perks this year in return for waiving bonus money (nice new chair, desk riser, more vacation days)

Any other suggestions? With #2, I would put it in writing that I am NOT waiving the bonuses, that I am merely deferring them, and that if I separate from employment this year, I am due the bonuses immediately. I actually did this late last year, and it worked, but in that case I only deferred comp for like 6 weeks. Here, I'm deferring comp for like 6 months. I guess in the back of my mind, my security gland goes off deferring a good amount of money for so long. What if I separate from employment and there's a dispute about it? Just thinking about it.

EDITED TO ADD: I do have a "side hussle" writing business. I suppose, to the extent I couldn't contribute much to my workplace 401k in 2020 because of HCE, I could contribute to a solo 401k on the employer side, so 25% of revenue. So that might help a little, but not a lot. If I earned $10,000 in my side hussle next year, that would only let me contribute an additional $2500. Is there anything wrong with this thought process?

[dandarc]

How about "I'll agree to waive the bonus if you convert to a safe-harbor 401K".

Seems absurd that you're at such a small employer and the 401K can't be changed - you should have some pull.

[Nick_Miller]

How about "I'll agree to waive the bonus if you convert to a safe-harbor 401K".

Seems absurd that you're at such a small employer and the 401K can't be changed - you should have some pull.

Trust me, I want to have the conversation, but I think it's hard for a business owner to agree to a perpetual expense in exchange for some one-time cost savings.

[dandarc]

How many employees are there? Also - pitch it as a benefit for the owner themselves. Surely they are also Highly Compensated and could thus save quite a bit in taxes, right? Or if they don't care about that "when I leave, you'll have an easier time finding a replacement if your benefits are good".

[Nick_Miller]

How many employees are there? Also - pitch it as a benefit for the owner themselves. Surely they are also Highly Compensated and could thus save quite a bit in taxes, right? Or if they don't care about that "when I leave, you'll have an easier time finding a replacement if your benefits are good".

Yeah, I'll try some angle. I appreciate you helping me brainstorm here.

The thing is, it was a HUGE win for me last year to get Boss Man to start a 401k. I am pretty much the only one who uses it! Boss Man doesn't use it (go figure!). Three support staff people don't use it. Only one other employee, my main support staff person, uses it, and she only puts in a few thousand dollars a year. So I basically own like 92% of plan assets at this point. I feel like the whole thing has been a benefit for me.

[dandarc]

That's a tough one. Sounds like the owner is likely to say "you can only put $2K in? Oh well - you can still do something". Whereas you're at "This makes my compensation ~$5K /year less than it was last year".

I also think boss-man might be being cheap here. 3% match on what, $300K of total payroll? Maybe less? Could conceivably be "paid for" if they just maxed out a contribution for themselves - would depend on boss-man's marginal rate.

You could always start looking for another job if this is a big enough deal to you and boss man won't budge. That's ultimately your biggest bargaining chip - "I don't have to work here". Turnover, particularly in this small of a business, is extremely expensive.

[dandarc]

I just noticed your side-business line.

You can contribute the employee-side to a 401K there as well. That would be the main reason to have a soloK vs. a SEP-IRA. $19K employee-side combined between all 401K's. I think you could contribute $9-10K per year on $10,000 of profit there.

[dandarc]

https://obliviousinvestor.com/solo-401k-contribution-calculator/

says $9,376 for a $10K side business, assuming you're a sole-proprietor for the side business.

[Blazin]

I thought the general rule of thumb for HCE is the general average % contributed +2%. So if co-worker is putting in $2000, which amounts to 5% of their annual salary you would be able to put in 7%.  A $2k contribution would be less than a 2% contribution of your income.  I would double check with your plan administrator!  Good luck in figuring this out.

[Joel]

I thought the general rule of thumb for HCE is the general average % contributed +2%. So if co-worker is putting in $2000, which amounts to 5% of their annual salary you would be able to put in 7%.  A $2k contribution would be less than a 2% contribution of your income.  I would double check with your plan administrator!  Good luck in figuring this out.

That’s what I’ve typically seen as well. The boss is also likely a HCE and since they are not contributing, that will really help with this calculation. Hopefully you are factoring that into your calculation properly.

[Kayad]

I’ll just note that traditional IRA contrib of 6k is another alternative if your 401k limit is really that low.

[former player]

Does the math work out for you to give the other member money to put into their 401k, upping their share of the contributions?  Just brainstorming here.

[terran]

I’ll just note that traditional IRA contrib of 6k is another alternative if your 401k limit is really that low.

Not with $124k of income. AGI needs to be under $103k if married, less if single to deduct traditional IRA contributions when you participate in a retirement plan at work.

[Nick_Miller]

Will figure out the exact calculations next week with a rep from our plan.

But I will note that we max our Roth IRAs each year (we maxed them for 2019 back in February)

Also, I've done some research and still CANNOT figure out if I could contribute to the employee side of a solo 401k if HCE rules keep me from maxing out my 401k contributions at work. However, I am fairly sure that I could contribute to the employer side of a solo 401k.

I can't find an exact answer for my situation. I did find this post where it is said that the OP is screwed in a similar situation, BUT it's slightly different in that the OP maxed out workplace 401k and THEN the plan sent the OP some money back after some testing determined contributions exceeded what was allowed per HCE limits.

https://www.bogleheads.org/forum/viewtopic.php?t=275750

[terran]

Also, I've done some research and still CANNOT figure out if I could contribute to the employee side of a solo 401k if HCE rules keep me from maxing out my 401k contributions at work. However, I am fairly sure that I could contribute to the employer side of a solo 401k.

Yes, you can. There is no such thing as a HCE in businesses that are eligible for a solo 401(k) because only business owners and their spouses are employed by the business, so no worries about unfairness in the plan, so the plan doesn't have to pass compliance testing.

The salary deferral limit is still $19k combined between all plans you participate in. Profit sharing is separate, and the 415(c) limit (2019 = $56k) is separate.

[Kayad]

I’ll just note that traditional IRA contrib of 6k is another alternative if your 401k limit is really that low.

Not with $124k of income. AGI needs to be under $103k if married, less if single to deduct traditional IRA contributions when you participate in a retirement plan at work.

Oops!

[Nick_Miller]

Also, I've done some research and still CANNOT figure out if I could contribute to the employee side of a solo 401k if HCE rules keep me from maxing out my 401k contributions at work. However, I am fairly sure that I could contribute to the employer side of a solo 401k.

Yes, you can. There is no such thing as a HCE in businesses that are eligible for a solo 401(k) because only business owners and their spouses are employed by the business, so no worries about unfairness in the plan, so the plan doesn't have to pass compliance testing.

The salary deferral limit is still $19k combined between all plans you participate in. Profit sharing is separate, and the 415(c) limit (2019 = $56k) is separate.

So do you agree with the answer given in the link I posted? Is the difference there that the OP actually maxed out their 401k contributions, making them ineligible for employee-side solo 401k contributions on their side hussle when they received the $4K back from their office 401K?

[terran]

Also, I've done some research and still CANNOT figure out if I could contribute to the employee side of a solo 401k if HCE rules keep me from maxing out my 401k contributions at work. However, I am fairly sure that I could contribute to the employer side of a solo 401k.

Yes, you can. There is no such thing as a HCE in businesses that are eligible for a solo 401(k) because only business owners and their spouses are employed by the business, so no worries about unfairness in the plan, so the plan doesn't have to pass compliance testing.

The salary deferral limit is still $19k combined between all plans you participate in. Profit sharing is separate, and the 415(c) limit (2019 = $56k) is separate.

So do you agree with the answer given in the link I posted? Is the difference there that the OP actually maxed out their 401k contributions, making them ineligible for employee-side solo 401k contributions on their side hussle when they received the $4K back from their office 401K?

Yes, the first post by Spirit Rider (who I would consider the definitive authority on topics like this barring a very clear contradictory statement directly from the law or an IRS publication) seems to pretty clearly indicate that the problem is that the OP had already met the 402(g) (2019 = $19k) limit and part of that contribution being refunded has to baring on whether or not the limit was reached.

As long as you don't contribute the amount to your main employer's plan in the first place it seems pretty clear to me that you can contribute to your solo 401(k) up to the lesser of your side business net profit minus 1/2 of self employment tax or the limit minus salary deferral contributions to your main employer 401(k). You can also make profit sharing contributions to your solo 401(k) if you have enough income to support it regardless of how much you contribute to you main employer 401(k) as that's a separate limit.

One thing to note, which Spirit Rider alludes to in that post is that any tax deferred contributions you make to your solo 401(k) will reduce your Qualified Business Income (QBI) deduction, which means your marginal tax savings is less that you might think (effectively you only recieve 80% of the deduction as you loose the 20% QBI deduction in equal proportion to the 100% 401(k) contribution). You could open a solo 401(k) at Vanguard, Etrade, or TD Ameritrade where you could make Roth contributions to avoid this. That only makes sense if the marginal bracket reduction makes your QBI loss adjusted marginal rate less than your expected marginal rate in retirement (including state taxes).