Why HCE has 401k contribution percent limited

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inspector00
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Joined: Sun Jun 30, 2013 9:08 pm

Why HCE has 401k contribution percent limited

Post by inspector00 »

I recently became classified as a HCE at my company due to a raise last year that put me over $135,000 in annual salary. The only implication of this is that my pretax/roth 401k contributions are limited to 17% as opposed to the 35% limit of all employees. 17% of $135,000 = $22,950 which is more than the annual limit, after tax contributions remain limited by a fixed 9% for all employees.

1. Does this really impact me in any way as someone under the age of 50 who can't make catchup contributions besides having to keep my contribution at 17% year-round rather than bumping it up and down.

2. What's the point of this rule since if my math is right it seems to only impact employees over 50 with between $135,000 -> $176,000 which doesn't seem too significant.
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ccf
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Re: Why HCE has 401k contribution percent limited

Post by ccf »

It could also reduce your employer 401k match or profit sharing since the limit applies to all contributions
Affable at 50
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Re: Why HCE has 401k contribution percent limited

Post by Affable at 50 »

inspector00 wrote: Sun Mar 19, 2023 9:07 pm I recently became classified as a HCE at my company due to a raise last year that put me over $135,000 in annual salary. The only implication of this is that my pretax/roth 401k contributions are limited to 17% as opposed to the 35% limit of all employees. 17% of $135,000 = $22,950 which is more than the annual limit, after tax contributions remain limited by a fixed 9% for all employees.

1. Does this really impact me in any way as someone under the age of 50 who can't make catchup contributions besides having to keep my contribution at 17% year-round rather than bumping it up and down.

2. What's the point of this rule since if my math is right it seems to only impact employees over 50 with between $135,000 -> $176,000 which doesn't seem too significant.
The HCE-classification could impact you in unexpected ways since your contribution limit within your company’s plan depends on the level of non-HCE participation in the plan. If the contributions from non-HCE fall off, you may find your contributions limited more than expected.

If your company fails the nondiscrimination test, which it must perform every year, it will probably refund you the excess contributions you made. This will be considered taxable income.
exodusNH
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Re: Why HCE has 401k contribution percent limited

Post by exodusNH »

inspector00 wrote: Sun Mar 19, 2023 9:07 pm I recently became classified as a HCE at my company due to a raise last year that put me over $135,000 in annual salary. The only implication of this is that my pretax/roth 401k contributions are limited to 17% as opposed to the 35% limit of all employees. 17% of $135,000 = $22,950 which is more than the annual limit, after tax contributions remain limited by a fixed 9% for all employees.

1. Does this really impact me in any way as someone under the age of 50 who can't make catchup contributions besides having to keep my contribution at 17% year-round rather than bumping it up and down.

2. What's the point of this rule since if my math is right it seems to only impact employees over 50 with between $135,000 -> $176,000 which doesn't seem too significant.
If your employer doesn't have a Safe Harbor plan and your coworkers/employer don't contribute enough to the plan, you may find yourself limited below the theoretical max. You probably won't find this out until March 2024 when they refund some of your contributions.

You might consider finding an employer with a better retirement plan or pushing your current employer to fix theirs, which may be cheaper than replacing HCEs leaving for better pastures.
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inspector00
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Re: Why HCE has 401k contribution percent limited

Post by inspector00 »

Thanks, the plan is actually pretty good. 100% match on up to 5% of contributions and a 3% company contribution in addition to that no matter what with the employee contributes. They also have low cost index fund options.
Navillus1968
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Re: Why HCE has 401k contribution percent limited

Post by Navillus1968 »

inspector00 wrote: Sun Mar 19, 2023 9:07 pm I recently became classified as a HCE at my company due to a raise last year that put me over $135,000 in annual salary. The only implication of this is that my pretax/roth 401k contributions are limited to 17% as opposed to the 35% limit of all employees. 17% of $135,000 = $22,950 which is more than the annual limit, after tax contributions remain limited by a fixed 9% for all employees.

1. Does this really impact me in any way as someone under the age of 50 who can't make catchup contributions besides having to keep my contribution at 17% year-round rather than bumping it up and down.
You don't mention whether you are using the after-tax 401k option, but I think after-tax & pre-tax are both included in the 17% HCE contribution limit.

"But it is important to keep in mind after-tax contributions can be “testy,” and they may not be right for every participant and every plan.

There are several considerations for allowing after-tax contributions to a 401(k) plan, including whether the plan permits after-tax contributions in the plan document and, if so, who can make them and what limits (IRS and/or employer-imposed) may apply. And when I say, testy, I mean, after-tax contributions are included in several key IRS compliance tests that apply to 401(k) plans, including the actual contribution percentage (ACP) test, the annual additions test and top-heavy test."
https://www.pentegra.com/current-thinki ... derations/

Note: For 2023, the HCE salary threshold was boosted to $150k, from 2022's $135k. Not sure where your salary hits, but 17% of $150k is $25.5k, which would allow you to max out pre-tax & put $3k in after-tax.
2. What's the point of this rule since if my math is right it seems to only impact employees over 50 with between $135,000 -> $176,000 which doesn't seem too significant.
Just FYI- catch-up contributions for over-50 folks are not affected by HCE throttling, so your older HCE co-workers should be able to contribute the full $7.5k for 2023.

PS- Being "throttled" at 17% is pretty sweet. There must be something I'm missing, but I would think a 401k with 5% employer matching (plus a 3% bonus contribution from the company) would be a Safe Harbor 401k, immune from HCE testing, but obviously not.
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teen persuasion
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Re: Why HCE has 401k contribution percent limited

Post by teen persuasion »

Ok, I can understand limiting HCE contributions if there's a chance the plan will fail testing. But why would you limit non-HCE contributions to 35%? Wouldn't you WANT to increase those contributions to prevent test failure?

I've currently cut my retirement contributions back from 80% to 50%. I was even at 100% when we first got an employer plan, because it started mid-year and I was trying to get as much as possible in (utilized DH's larger income for expenses, obviously). Even when DH was sole bread-winner, we had his contribution up to 55%.

It takes a much higher percentage of smaller incomes to hit the max contribution.
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