New here...

[Guest Donnie]

I changed jobs and now signing up for my new 401K. I now have an issue with the max limit contribution because of HCE.

What is the max limit that I may contribute?

How is it calculated?

I have another question to ask but will wait till this one is answered...

[rcline46]

The answer here could be extensive, but I will do short ones.

If you are in a new company that was not in a controlled group or ASG with the old company, you can only be an HCE this year if you own through attribution or by yourself more than 5% of stock, capital or profits.

You can contribute: (all based on document rules - must have the document!)

1. $13,000 (plus catch up)

2. All of your pay after mandatory taxes/deductions/reductions

3. % or $ limit in the document

4. % or $ limit established by the company each year.

And lastly, if the HCEs as a group contribute more than is permitted in the 401k testing rules, then you may receive some of your contribution back.

[Guest Pensions in Paradise]

rcline46 is still in denial that s(he) is another year older. Item 1 should read $14,000 (plus $4,000 catch up if eligible).

[david rigby]

And lastly, if the HCEs as a group contribute more than is permitted in the 401k testing rules, then you may receive some of your contribution back.

If the plan is "safe-harbor" this may not apply.

[Guest Donnie]

Hey thanks for the replies!! I am just learning so you gave a bit to chew on. I was thinking that the answer was not as clear as I wanted it to be... that's based on the lack of other post that don't clearly state the answer I was looking for... anyway I will use what you gave me to investigate further.

I started with this new company last year and was told that I had to wait till this April to start my new 401K with their group. (??) I am pretty sure I am rank in the HCE based on my gross income + car allowance (see that question below). So my new question is does this information above change the answers that I just got from you? Also, what is the "document"?

My other question is this, my new company gives me an "other income" once a month (taxed at the end of the year) for my "car allowence". Would that count toward my gross income?

Sorry for such a long winded message and question. I am interested in starting my new plan. I am ramping up to dump the max amount now and then cut back when I learn the actual amount later...

[david rigby]

Also, what is the "document"?

A written document specifying the terms of eligibility, vesting, what type(s) of contributions to the plan are permitted, when and how benefits are payable from the plan, etc. In the US, qualified plans are required to have written document to incorporate its terms (limited exceptions). No plan is perfect, or complete, but a well-written plan is important for smooth and equitable administration.

Another requirement of US pension law is that participants be given a "summary plan description". The SPD should be written in language that is understandable by the average participant, and should provide sufficient summary to understand its terms.

If there is any primary advice from these Message Boards, it will be "read the SPD first".

[GBurns]

Another term for "document" is Plan Document. As pax stated read the SPD first but if anything is not clear you might want to look at the Plan Document (PD).

The definition of compensation or whatever your contributions will be based on are set out in the SPD and PD. Whether you are an HCE and have any limitations on contributions should be determined by the Plan Administrator who will tell you if there is or will be a problem.

[Guest Donnie]

Thanks...

I have some more digging to do. You gave me some good starting points. My HR group is rather "soft" when it comes to knowing the ins and outs of any plan... don't me wrong I like the people but...

I did hear today that it would be a good idea to drop some of the 401K contribution and start a Roth IRA to balence out the taxes (Ie pay taxes when you withdrawl on the 401K and no taxes with the withdrawl with the IRA). I got so much to learn...

Thanks again.

[david rigby]

The first rule of 401(k)'s (some would say the first rule of investing) is to contribute whatever percent (could be a dollar amount, but usually expressed as a percent) will generate a matching contribution by your employer. For example, if your employer matches 50% of your first 5%, then you should contribute (at least) 5%. Think of that as an automatic 50% earning on your investment.

[Lame Duck]

There are income limitations on who may contribute to a Roth. If you are single and your income is over $110,000 or married filing jointly and your income is over $160,000, you cannot contribute to a Roth. If you are single and your income is between $95,000 and $110,000 or married filing jointly and your income is between $150,000 and $160,000, you can make a reduced Roth IRA contribution. If your income is below $95,000 (single) or $150,000 (maried, filing jointly), you can make a full Roth contribution. See IRS Publication 590 for a more detailed explanation on the rules for contributing to a Roth.

[MGB]

Just a quick addition to Pax's last comment:

If you are only going to contribute the amount that generates the maximum employer match, you should find out the following about your plan (this may be an issue anyway, even if you are contributing more).

Do they do an adjustment at the end of the year for accelerated contributions? I.e., let's say the company matches 50% of the first 6% of compensation that you contribute and that you contribute 12% for half a year (0% for the remainder). Will you get the full 50%, given that you contributed 6% on a full year basis?

Not all plans will do this adjustment at the end of the year. Some will only match in each payroll period. So, in the above example, you get a match for the first half of the year, and no match for the second half. In total, you only get an employer amount of 1.5% instead of 3%. In this situation, you want to contribute 6% every payroll period throughout the year instead of accelerating the contribution.

Of course, if you are in a plan (ask!) that makes an end-of-year adjustment based on the 6% for the entire year, you can accelerate all you want. These adjustments are called various things, but most often "true-ups".