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Can someone explain the highly compensated employee 401k rule
Posted on 6/29/15 at 10:49 pm
Posted on 6/29/15 at 10:49 pm
For the last three years my pretax contributions have been capped at 12% by my employer. Because of this I fall short of the pre tax max every year now. What's the point of having a limit if I'm not even allowed to get to it and how is this legal?
4
Posted on 6/29/15 at 11:02 pm to jmh5724
quote:LINK
The test is as follows: the average contributions of highly compensated employees, as a group, cannot exceed the average contributions of nonhighly compensated employees, as a group, by more than about 2 percent. (Age-50 catch-up contributions are not included in discrimination testing.)
It's supposed a way to make sure companies aren't offering 401ks to only the top earners. However, if the low earners aren't taking advantage of the 401k, then the HCE's get screwed.
Posted on 6/30/15 at 6:43 am to jmh5724
I really dislike this rule. It really screws people who are just trying to ensure a good retirement.
Posted on 6/30/15 at 8:04 am to jmh5724
Ask your employer to look into safe harbor plans
Posted on 6/30/15 at 10:15 am to jmh5724
quote:
For the last three years my pretax contributions have been capped at 12% by my employer. Because of this I fall short of the pre tax max every year now. What's the point of having a limit if I'm not even allowed to get to it and how is this legal?
As others have said, there are ways around this rule, however, that way around will generally cost your company money. If you are upset at anyone, be upset at your company for being cheap and not doing a safe harbor match.
Is the rule "fair"? Probably not, but it was put in place to ensure that all employees have access to a 401K plan. Like many government regs, it's solves the job by using a sledgehammer rather than a small hammer.
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