401k and Highly Compensated

[Outtahere]

Does it makes sense to contribute the max to your 401k even if you know at the end of the year you'll be recieving money back once they do the testing for highly compensated employees?

 

[Martha]

Why is your business failing the nondiscrimiation tests? Do you have both a 401k and profit sharing, up to the $44,000 maximum?

I really don't like undoing the contributions. At our office we are pretty good at figuring out who might go over the maximum and we cut off their individual contributions before year end. On the last day of the year we figure the maximum contributions out exactly. We only were wrong once, requiring a refund of a $750 contribution. The contribution was mine. Took nine months to get my money back.

 

[Sheryl]

We don't figure the profit-sharing until February or so. Then its simple to see how much is left to stay under the max. I guess if one of us (like me) was maxing individual contributions, and the others were insistent on maxing the profit-sharing they were entitled to I could go over, but we just limit the profit sharing to the max that any one of us can take without going over.

Otherwise, doesn't it turn into a big penalty for the people who make higher individual contributions, because they get less than an "equal" share of profit sharing?

 

[Outtahere]

There is no profit sharing and the 4 managers are considered highly compensated. There is no penalty other than who ever gets a check has to add it back into their taxable income for the year and the checks are cut right away so that's not a problem.

My question was more in the line of since the money is working in your 401k does it make sense to cut contributions? For a short period you have that extra working for you tax free right?

 

[Martha]

I know I am not answering your question, but why don't you guys set up a safe harbor plan so you don't fail the discrimination tests? http://www.401khelpcenter.com/cw/cw_safe_harbor_401(k).html

Managment might be able to put a bunch more money away.

 

[Martha]

Otherwise, I can't see anything wrong with what you are doing.

 

[free4now]

I don't know anything about the Highly Compensated rules, but one thing to consider is what happens in the year that you leave your work... contributing more might mean that if you leave in the middle of the year you have contributed more to the 401k for that year.  

I contributed the full 15% to my 401k that I could, even though I would normally run into the dollar limit on contributions towards the end of the year.  

 

[Sheryl]

I know I am not answering your question, but why don't you guys set up a safe harbor plan so you don't fail the discrimination tests?  http://www.401khelpcenter.com/cw/cw_safe_harbor_401(k).html

Managment might be able to put a bunch more money away.

We have a safe harbor plan. It's quite beneficial to the HCI's (Highly Compensated Individuals) in that as long as we make a minimum contribution to all employees (3%) we can make three times that amount to ourselves.

Of course, given that Outahere wants to get Outathere she probably doesn't want to screw around changing plans now...

 

[Outtahere]

We just changed plans so that's not an option but we've tossed around the safe harbor plan, I'm for it and the person that we deal with for our plans is but my partners are reluctant because it would triple the company contribution. Their plan is to encourage the employees to put in more but that's never worked in the past and I doubt it will now.

I've hit the 50 mark so any extra I am over is put towards my catchup. I wish I could put in more but I'll take what I can get.