401k contribution for HCE(Highly Compensated Employee)

[ER_Hopeful]

so I crossed the threshold and became a HCE in 2017. In my 401k this year, the plan admin (Fidelity) automatically dropped my contribution to 9% from 15%. This means I'm only allowed to put in around $10800 instead of the 18k.

Not really understanding the logic behind this lower cap. any way I can make the additional $7k pretax ? would a traditional IRA help ?

 

[cathy63]

Sorry, but you are out of luck. If your salary is high enough that you are an HCE, then you are beyond the limits for having a deductible IRA. You can still make a non-deductible contribution and then immediately convert it to a Roth IRA. You'll pay the full income tax due on the amount you put in the Roth, but at least it will grow tax free.

The HCE tests and limits are put in place by the IRS to ensure that 401Ks are not disproportionately benefiting people who get paid more while excluding those who get paid less. Since the earnings threshold for HCEs has not kept up with salary growth over the years, and since it was never really reasonable for some industries or some hcol locales anyway, the rules really just end up preventing a lot of middle tier earners from saving as much as they want to.

There are three things you can do to make the 401K fully available to you again, but none of them are really practical:
- try to get more of the non-HCEs you work with to contribute
- convince your company to provide additional matching or direct contributions for the lower earners
- if you are just barely over the HCE threshold and don't anticipate having a salary increase again in the next year or two, then you can offer to take a pay cut that puts you below the limit in exchange for an extra day or two of vacation time

 

[gauss]

DW was an HCE one year with her 401k limitations capped. The problem never occurred again in subsequent years, event though she received significant raises and at least one major promotion.

Perhaps the "Match" was reduced during the recession, which may have changed behavior in the non-HCE population and thus triggered the problem.

My point is hopefully this may be a temporary problem.

-gauss

 

[bada bing]

If you have any influence on 401K plan decisions, lobby to get your company's
plan in compliance and certified as a Safe Harbor plan. The rules are
pretty simple:
offer a 4% match or
3% direct contribution without matching requirements
Safe Harbor plans don't have the problem of lowered limits for HCEs.

 

[Ready]

If you have any influence on 401K plan decisions, lobby to get your company's
plan in compliance and certified as a Safe Harbor plan. The rules are
pretty simple:
offer a 4% match or
3% direct contribution without matching requirements
Safe Harbor plans don't have the problem of lowered limits for HCEs.

Agreed! I had the same problem at my last two companies and in both cases we switched to the safe harbor plan to solve the problem. The main reason most companies don't want to switch is if the company match is lower than the amount required by the safe harbor plan. If there are a lot of employees, the annual increase to the company can be quite substantial.

Lobby your HR department to convert. It can't hurt to ask.

 

[Backpacker]

When we ran into this it affected only top 3 employees, me CEO and president. We added a 457b for all VPs. We were all capped at 6% in the 401k, way too low for me to FIRE. DW and I were still below maximum income limit so were able to Max out Roth IRA contribution too. Had I not been able to use 457b to reduce taxable income we would have been locked out of Roth too.

 

[Ronstar]

Agreed! I had the same problem at my last two companies and in both cases we switched to the safe harbor plan to solve the problem. The main reason most companies don't want to switch is if the company match is lower than the amount required by the safe harbor plan. If there are a lot of employees, the annual increase to the company can be quite substantial.

Lobby your HR department to convert. It can't hurt to ask.

I had a couple of years where I couldn't contribute the max. We switched to a safe harbor plan that allowed me to max out. But the company had to contribute 3 or 5% for everyone in the firm - not just 401k participants. It was expensive.