Author Topic: Wife now classified as HCE - options?  (Read 843 times)

Apocalyptica602

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Wife now classified as HCE - options?
« on: November 19, 2019, 11:07:52 AM »
Hi guys,

My wife and I were reviewing our 401k contributions to make sure we were on track to hit the $19K each at the end of the year. I was shocked to see that she's only been contributing 6%. She didn't change her contributions and I was initially upset because now she'd have to contribute ~100% of her paycheck through the end of the year.

After some calls to the 401k provider and payroll / benefits divisions - turns out she's now classified as a Highly Compensated Employee. The problem is she 'only' makes ~$125k so the 6% restrictions prevents her from saving more than ~$8k pre-tax.

Last year she made the same money and wasn't classified as such - so they must've failed their 401k non-discrimination test?

Was just wondering if there are any other traditional options or is this just an unavoidable haircut to her 401k contributions.

We already max HSA, MFJ, our family income is above both the deduction limit for traditional IRAs and the contribution limit for Roth IRAs, we use the maximum limit of dependent care FSA for our son's daycare and also fund his 529 to the max.

Thanks!

EvenSteven

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Re: Wife now classified as HCE - options?
« Reply #1 on: November 19, 2019, 11:51:44 AM »
Your wife could petition her work to offer employees a better 401k that meets the safe harbor rules. Other than that I don't think there is an option there.

Are you in a position where you can make a backdoor Roth contribution? (No traditional IRA balances)

mm1970

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Re: Wife now classified as HCE - options?
« Reply #2 on: November 20, 2019, 04:28:21 PM »
I don't think you can really do anything.

The HCE limit on contributions to 401k takes effect the year AFTER you hit that number.  So, for 2018 the number was $120k.  If you were making that much, or more, in 2018 then you are classified as an HCE for 2019.  (The 2019 number is $125k.  So, the ~ in your number matters.  If she's actually at $124,900, then for 2020, she can go back to contributing the max.)

I had the similar issue in that I got a raise at beg 2018 to EXACTLY the HCE number.  I almost asked them to just short my paycheck by $1.  They didn't.  They have been allowing me to contribute the full amount HOWEVER, the IRS may run a test and make them refund me.  I dunno.  As I haven't had a raise since, I won't be an HCE for next year.  In reading the rules, it's the AVERAGE put into 401ks by the HCEs, and I know that my company does limit HCE % contributions (my old boss told me so).  It's entirely possible that my contributions alone this year will throw it out of whack.

If her work makes changes (like matching), then she can go back to putting in the full amount.  She could also take a paycut to come under $125k for 2019, and would not be an HCE for 2020.