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Can someone elaborate/explain on the Highly Compensated Employee Limitations for a 401k
Posted on 6/22/23 at 8:27 am
Posted on 6/22/23 at 8:27 am
I just don't understand the reasoning behind this. How does limiting my contributions help equal the playing field for people who make less than me?
5
Posted on 6/22/23 at 8:31 am to southside
Less tax advantage. So the less you contribute to a 401k, the more your taxes go up. Thus taxes contribute to those government tit suckers to boost them up.
Posted on 6/22/23 at 8:49 am to southside
quote:
Can someone elaborate/explain on the Highly Compensated Employee Limitations for a 401k by southside
My information is about 30+ years old from my father (second hand) and his company.
But essentially, the 401k plan is for the employees.
If upper management participate without the active participation of the employees, then the 401k opportunity could go away entirely.
So upper managements participation rates can be capped by the employees participation.
It is one reason why company match is offered (it ups participation of all employees which permits upper management to take better care of themselves).
Posted on 6/22/23 at 8:52 am to southside
Subtle high compensation brag. Also, I have been in a similar situation at a previous job and the company simply decided to shut down the 401k entirely as only the highly paid folks were participating, which sucked a lot for me at the time.
I just asked chatgpt about the reasons for/virtue of these restrictions. Here's what it said:
The reasons for and virtue of 401(k) limitations for highly compensated employees stem from the goal of maintaining fairness and preventing the disproportionate benefit of high-income individuals within retirement savings plans. Here are some key points to consider:
Promoting equality: 401(k) plans were designed to provide retirement savings opportunities to all employees, regardless of their income level. Limiting the contributions of highly compensated employees helps ensure that lower-income employees have a reasonable opportunity to save for retirement and receive comparable benefits. By preventing an excessive concentration of retirement benefits among higher earners, the limitations promote a more equitable distribution of retirement savings across the workforce.
Non-discrimination testing: The Internal Revenue Service (IRS) requires 401(k) plans to undergo non-discrimination testing to ensure that the plan does not favor highly compensated employees. These tests examine whether the contributions made by highly compensated employees significantly exceed those made by non-highly compensated employees. If the plan fails these tests, it could result in tax consequences and penalties for the highly compensated employees.
Compliance with tax laws: The limitations imposed on highly compensated employees' 401(k) contributions help plans remain compliant with tax laws. The IRS sets annual limits on the amount of contributions that can be made to 401(k) plans to maintain the tax-deferred status of these accounts. Exceeding these limits can lead to adverse tax consequences and jeopardize the qualified status of the plan as a whole.
Encouraging broader employee participation: Limiting the contributions of highly compensated employees can encourage broader participation in 401(k) plans. When contributions from high earners are restricted, it may incentivize them to explore other retirement savings options, such as employer-sponsored profit-sharing plans, to maximize their overall retirement savings. This, in turn, can help boost employee engagement and involvement in retirement planning across the organization.
Protecting retirement savings incentives: Implementing limitations on highly compensated employees' contributions helps protect the tax incentives associated with retirement savings plans. By preventing excessive contributions from high earners, the government can maintain the fiscal integrity of the retirement savings system and ensure that tax benefits are distributed equitably among all participants.
In summary, 401(k) limitations for highly compensated employees aim to promote fairness, prevent discrimination, ensure compliance with tax laws, encourage broader employee participation, and protect the overall integrity of retirement savings incentives. These limitations help create a level playing field and foster a retirement savings environment that benefits all employees.
I just asked chatgpt about the reasons for/virtue of these restrictions. Here's what it said:
The reasons for and virtue of 401(k) limitations for highly compensated employees stem from the goal of maintaining fairness and preventing the disproportionate benefit of high-income individuals within retirement savings plans. Here are some key points to consider:
Promoting equality: 401(k) plans were designed to provide retirement savings opportunities to all employees, regardless of their income level. Limiting the contributions of highly compensated employees helps ensure that lower-income employees have a reasonable opportunity to save for retirement and receive comparable benefits. By preventing an excessive concentration of retirement benefits among higher earners, the limitations promote a more equitable distribution of retirement savings across the workforce.
Non-discrimination testing: The Internal Revenue Service (IRS) requires 401(k) plans to undergo non-discrimination testing to ensure that the plan does not favor highly compensated employees. These tests examine whether the contributions made by highly compensated employees significantly exceed those made by non-highly compensated employees. If the plan fails these tests, it could result in tax consequences and penalties for the highly compensated employees.
Compliance with tax laws: The limitations imposed on highly compensated employees' 401(k) contributions help plans remain compliant with tax laws. The IRS sets annual limits on the amount of contributions that can be made to 401(k) plans to maintain the tax-deferred status of these accounts. Exceeding these limits can lead to adverse tax consequences and jeopardize the qualified status of the plan as a whole.
Encouraging broader employee participation: Limiting the contributions of highly compensated employees can encourage broader participation in 401(k) plans. When contributions from high earners are restricted, it may incentivize them to explore other retirement savings options, such as employer-sponsored profit-sharing plans, to maximize their overall retirement savings. This, in turn, can help boost employee engagement and involvement in retirement planning across the organization.
Protecting retirement savings incentives: Implementing limitations on highly compensated employees' contributions helps protect the tax incentives associated with retirement savings plans. By preventing excessive contributions from high earners, the government can maintain the fiscal integrity of the retirement savings system and ensure that tax benefits are distributed equitably among all participants.
In summary, 401(k) limitations for highly compensated employees aim to promote fairness, prevent discrimination, ensure compliance with tax laws, encourage broader employee participation, and protect the overall integrity of retirement savings incentives. These limitations help create a level playing field and foster a retirement savings environment that benefits all employees.
Posted on 6/22/23 at 10:08 am to Costanza
quote:
Subtle high compensation brag. Also, I have been in a similar situation at a previous job and the company simply decided to shut down the 401k entirely as only the highly paid folks were participating, which sucked a lot for me at the time.
A subtle high compensation brag by comparing to a subtle high compensation brag
Posted on 6/22/23 at 10:15 am to Roy Curado
quote:
A subtle high compensation brag by comparing to a subtle high compensation brag
Posted on 6/22/23 at 10:25 am to southside
I think the general thought is it encourages the highly compensated employees(who presumbly would be the ones making the decisions on the implementaion of the 401k plan), to design the plan in a way that encourages participation from the most employees possible, especially those at lower wage bands. If the plan is primarily utilized by a small group of highly-compensated employees who are the least likely to need incentives to save for retirement in the first place, it eliminates the purpose that 401k's were legislated for.
This post was edited on 6/22/23 at 10:27 am
Posted on 6/22/23 at 10:35 am to Costanza
quote:
Subtle high compensation brag
If we're considering >$135k as high compensation. $135k isn't excessive to provide for a family, while saving for retirement, and battling inflation. Hell of a reach by the government for $135k to be considered "high compensation"
This post was edited on 6/22/23 at 10:37 am
Posted on 6/22/23 at 10:49 am to southside
Right, the compensation cutoff isn't as high as people think.
At my last company I could look at everyone's 401ks and see who was contributing and what they were contributing to. I was pretty surprised that there were people making some really good money and were contributing nothing or very little. Also around 95% of the invested funds were all in target funds despite having an S&P 500 tracking fund, a total bond fund, and a total stock market fund being available. People really give zero thought to their future. Pretty wild.
At my last company I could look at everyone's 401ks and see who was contributing and what they were contributing to. I was pretty surprised that there were people making some really good money and were contributing nothing or very little. Also around 95% of the invested funds were all in target funds despite having an S&P 500 tracking fund, a total bond fund, and a total stock market fund being available. People really give zero thought to their future. Pretty wild.
Posted on 6/22/23 at 10:57 am to FinleyStreet
quote:
At my last company I could look at everyone's 401ks and see who was contributing and what they were contributing to. I was pretty surprised that there were people making some really good money and were contributing nothing or very little. Also around 95% of the invested funds were all in target funds despite having an S&P 500 tracking fund, a total bond fund, and a total stock market fund being available. People really give zero thought to their future. Pretty wild.
I've had the same experience. Mindblowing. I'm thankful everyday that my parents taught me the importance of investing at an early age.
Posted on 6/22/23 at 5:12 pm to southside
quote:
If we're considering >$135k as high compensation. $135k isn't excessive to provide for a family, while saving for retirement, and battling inflation. Hell of a reach by the government for $135k to be considered "high compensation"
It’s been going up most years. I think it was 135k a few years ago so it’s probably higher now in 2023.
I’m capped and 6% and it sucks.
Posted on 6/23/23 at 7:28 am to Rize
$135k does seem low for this designation (its now $150k this year). There is an additional point of also being in top 20% at your company.
From IRS:
Highly Compensated Employee - An individual who:
Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
For the preceding year, received compensation from the business of more than $125,000 (if the preceding year is 2019, 130,000 if the preceding year is 2020 or 2021, $135,000 if the preceding year is 2022), and $150,000 (if the preceding year is 2023) and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.
Subtle brag alert.. I’m over $150k but definitely not designated as a HCE
From IRS:
Highly Compensated Employee - An individual who:
Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
For the preceding year, received compensation from the business of more than $125,000 (if the preceding year is 2019, 130,000 if the preceding year is 2020 or 2021, $135,000 if the preceding year is 2022), and $150,000 (if the preceding year is 2023) and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.
Subtle brag alert.. I’m over $150k but definitely not designated as a HCE
Posted on 6/23/23 at 9:56 pm to southside
quote:
I just don't understand the reasoning behind this. How does limiting my contributions help equal the playing field for people who make less than me?
The idea is that upper management makes the decisions on 401k policies that influence participation. Typically upper management are paid more than others in the organization. So in order to provide an incentive (or punishment) to the upper management, they created a limitation, based on compensation, on what you can contribute based on employee participation in the 401k program.
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