Meeting 401(k) Discrimination Policies

Discussion in 'Off-Topic Discussions' started by JoAnnP38, Sep 9, 2005.

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  1. JoAnnP38

    JoAnnP38 Member

    Based on my salary I meet the legal definition of a highly compensated employee. For those of you who may not know what this definition is I believe its anyone who makes over $90,000 (or it was back in 2004.) Based on my company's 401(k) plan discrimination testing, the benifits department has decided to institute a percentage cap on HCEs for the remainder of the year (the cap went from 30% to 10%). Of course we are all limited to contributing more than $14,000 by statute. However, what occurs to me is that this is a shaft (of various degrees) to those making between $90K and $140K since anyone making more than $140K couldn't have contributed more than 10% anyways.

    After having worked for a company whose primary products are HRMS/Payroll systems for the past 11 years I should probably know this, but does anyone know if this is the standard way to deal with this problem? Wouldn't it be more equitable to limit our contributions to a fixed amount (something less than $14,000?)
     
  2. gkillion

    gkillion New Member

    This has also happened to me. The determination of a HCE, I think is not based on a specific salary, but on the relationship of the HCE to other lower paid employees. Usually HCEs will receive a check at the end of the plan year for all contributions over the HCE limit. The HCE limit and the statutory limit are not necessarily the same.

    Your company could elect to adopt a "Safe Harbor" plan which eliminates descrimination testing, but usually increases the matching percentage for the company.

    The "shaft" is coming from the IRS. The $14,000 limit is the most you can save tax-deferred. You can save as much as you want, you just can't get the tax advantage on all of it. Whether it's a percentage or a fixed amount, the IRS rules don't change.

    Disclaimer.
    I'm by no means an expert on 401k's, but this is my understanding based on my experience.:)
     

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