penalities for being "highly" compensated

[simple girl]

DH just found out because he made over 100K last year (just a little over) he is now classified as "highly compensated" by the company...as such, we are now restricted from contributing more than 10% to his 401K. This means we won't be able to contribute the full amount that is allowed to most individuals. It really stinks b/c it was just over 100K, and he likely will be under 100K this year.

Just posting to complain.

I guess that means more for the taxable account.

 

[ats5g]

Does he get access to the "highly compensated" dining room now?

 

[FinanceDude]

DH just found out because he made over 100K last year (just a little over) he is now classified as "highly compensated" by the company...as such, we are now restricted from contributing more than 10% to his 401K. This means we won't be able to contribute the full amount that is allowed to most individuals. It really stinks b/c it was just over 100K, and he likely will be under 100K this year.

Just posting to complain.

I guess that means more for the taxable account.

Most likely his retirement plan was "top level tested" to make sure on an overall basis he can't contribute more than the guy trying to trade up his big screen TV for a bigger one each year.........

 

[REWahoo]

I think the "highly compensated" classification is tied to the max earnings taxable for SS - $97,500 in 2007, $102,000 for 2008. When you think about it, not a bad problem to have...

 

[Marquette]

When I was a highly compensated employee, I was capped at 4%. However, the company did offer a separate contribution plan and match for those of us in the overpaid pool. I don't recall it being all that good, though.

 

[FinanceDude]

I think the "highly compensated" classification is tied to the max earnings taxable for SS - $97,500 in 2007, $102,000 for 2008. When you think about it, not a bad problem to have...

That would not explain the lowering of the amount he can put into his 401K, though........

 

[Marquette]

That would not explain the lowering of the amount he can put into his 401K, though........

I'm fuzzy on the details, but I recall it that I was capped based on a multiple of the average contribution percentage. So, if the average for the company was 2% then I could contribute 4%.

 

[retire@40]

I think the "highly compensated" classification is tied to the max earnings taxable for SS - $97,500 in 2007, $102,000 for 2008. When you think about it, not a bad problem to have...

The sad part is, I know a lot of people in that salary range that are broke.

 

[REWahoo]

Has to do with the 401(k) not being a "safe harbor" plan, right? Until my old co went safe harbor, I was limited almost every year in what I could contribute due to the same HC rules. Two consecutive years I over contributed and got an unwelcome check back, right after filing my taxes. (Some of us are slow learners...).

 

[Marquette]

Wikipedia to the rescue: 401(k) - Wikipedia, the free encyclopedia

"The average deferral percentage (ADP) of all HCEs, as a group, can be no more than 2% greater (or 150% of, whichever is less) than the NHCEs, as a group. This is known as the ADP test. When a plan fails the ADP test, it essentially has two options to come into compliance. It can have a return of excess done to the HCEs to bring their ADP to a lower, passing, level. Or it can process a "qualified non-elective contribution" (QNEC) to some or all of the NHCEs to raise their ADP to a passing level."

 

[REWahoo]

Amazing how a simple explanation can clear up confusion...

 

[Marquette]

Amazing how a simple explanation can clear up confusion...

Here's my interpretation. If you're a highly compensated then you're likely in management. As such, the IRS doesn't want you to make 401(k) decisions that benefit you at the expense of the wage slaves you're trying to oppress. So, you're capped at 2% above them, or 150% of what they contribute, whichever is less. than your employees contribute.

Unfortunately, a lot of non-executive types get caught in the highly compensated net as well. I'm just glad to be at a company now where there is no net.

 

[LOL!]

Last year our CEO had just filed his taxes when he got a distribution from the 401(k) for overpayment because the plan had failed the ADP test. He was so livid that he would have to go back to his tax guy for the very small distribution to get an amended return filed. But did this cause him to fix the 401(k) plan with more matching? Absolutely not.

 

[REWahoo]

Marquette, I get it...just poking a little fun at the rather liberal use of acronyms in the Wiki explanation.

 

[simple girl]

Here's my interpretation. If you're a highly compensated then you're likely in management. As such, the IRS doesn't want you to make 401(k) decisions that benefit you at the expense of the wage slaves you're trying to oppress. So, you're capped at 2% above them, or 150% of what they contribute, whichever is less. than your employees contribute.

Unfortunately, a lot of non-executive types get caught in the highly compensated net as well. I'm just glad to be at a company now where there is no net.

NOT in management! Yep, one of those non-executive employees who makes a nice salary but put in overtime (yes, he get's paid OT, so thankful for that!).

I'm wondering if I should delay doing our taxes this year...I have a feeling they will be sending some of our $$ back from our 401K just in time to make us have to do an amendment...grrrrr.....

 

[Marquette]

Marquette, I get it...just poking a little fun at the rather liberal use of acronyms in the Wiki explanation.

I figured that you got it; I'm not sure that I do, though.

 

[REWahoo]

I figured that you got it; I'm not sure that I do, though.

Based on your translation above, I'd say you understand both the letter and the spirit of the law.

 

[Spanky]

DH just found out because he made over 100K last year (just a little over) he is now classified as "highly compensated" by the company...as such, we are now restricted from contributing more than 10% to his 401K.

This must be company specific. The company for which I work does not have such restriction. The amount is limited by what the law allows.

 

[Notmuchlonger]

I never heard of a limit. DW pulls in more than 100 a year and she can do the maximum.

 

[Independent]

Virtually all working people the the US consider themselves "middle class". But some of us really do have higher incomes than others.
According the the Census Bureau, less than 10% of people who worked full time for "50 weeks or more" in 2006 made more than $100k.

So it's time for a pat on the back, he really is one of those "high earners".

PINC-05--Part 1

 

[megacorp-firee]

I never heard of a limit. DW pulls in more than 100 a year and she can do the maximum.

has to do with comparisons to everyone in the company. Not a specific dollar clip level.

 

[myself]

Virtually all working people the the US consider themselves "middle class". But some of us really do have higher incomes than others.
According the the Census Bureau, less than 10% of people who worked full time for "50 weeks or more" in 2006 made more than $100k.

So it's time for a pat on the back, he really is one of those "high earners".

PINC-05--Part 1

Wow. 10% of full time workers made more than $100k. I've slipped in my status, since I "only" hit $95k this year.

 

[Martha]

Unless you have what is called a "safe harbor" 401k plan, the 401k contributions have to undergo discrimination testing each year. What I understand about discrimination testing is that the percentage contributions of highly compensated employees are compared to the percentage contributed by other employees. Highly compensated employees are those who are paid over $100,000(in 2007) plus people who own a certain ownership interest in the company. Or, I believe the company can define "highly compensated" as the top 20% earners.

As an example, if the highly compensated employees are contributing 15% of their income, up to the maximum contribution, but the other employees are contributing only 2%, the company might flunk discrimation testing and the highly compensated have to reduce their percentage contribution.

We had this problem where I used to work and we fixed it by moving to a safe harbor plan. This required us to make fairly significant employer contributions to all employees. However, this allowed us to contribute the maximum to our 401(k)and profit sharing plan for the highly compensated so everyone ended up better off.

 

[simple girl]

Unless you have what is called a "safe harbor" 401k plan, the 401k contributions have to undergo discrimination testing each year. What I understand about discrimination testing is that the percentage contributions of highly compensated employees are compared to the percentage contributed by other employees. Highly compensated employees are those who are paid over $100,000(in 2007) plus people who own a certain ownership interest in the company. Or, I believe the company can define "highly compensated" as the top 20% earners.

As an example, if the highly compensated employees are contributing 15% of their income, up to the maximum contribution, but the other employees are contributing only 2%, the company might flunk discrimation testing and the highly compensated have to reduce their percentage contribution.

We had this problem where I used to work and we fixed it by moving to a safe harbor plan. This required us to make fairly significant employer contributions to all employees. However, this allowed us to contribute the maximum to our 401(k)and profit sharing plan for the highly compensated so everyone ended up better off.

Wish DH's company would do the same, but it is such a huge megacorp I doubt it would be in their best interest to have to increase their contributions to all employees.

This discrimination testing seems unfair especially since we've always contributed the max, even when we made a lot less - since we LBYM'd all along. Doesn't seem right to me that it is assumed people only contribute 2% b/c that is all they could "afford" - since we all know people spend differently. So we in a sense are being penalized for making lots of money, and living below our means while others making less are potentially driving expensive cars, watching big screen t.v.'s, etc., in debt, etc. Oh well, I really am whining now! Waaaahhhh! As others have basically said, I need to get a grip and be thankful for our financial position. But it's just so much easier to complain, LOL

 

[armor99]

Virtually all working people the the US consider themselves "middle class". But some of us really do have higher incomes than others.
According the the Census Bureau, less than 10% of people who worked full time for "50 weeks or more" in 2006 made more than $100k.

So it's time for a pat on the back, he really is one of those "high earners".

PINC-05--Part 1

I think you are correct Independent. Almost everyone "thinks" they are middle class. However depending upon which definition you look at, the limits for what "middle class" is and is not, are wildly conflicting. I saw one chart that showed anyone making over 70k / yr is considered upper class. Others say over 100k. Why do so many people get the idea that somehow people that make more money than they do, are "taking" that money away from them? That is the "thinking" behind highly compensated earners not being allowed to save more. It is somehow believed that if we were all more "equal" then everything would be ok.... complete craziness....