Highly Compensated Employee Retirement Savings

[Guest pingilipkr]

My wife received a letter from her employer a couple of days ago which says they are going to limit her contributions to their 401k plan to 6%. The reason given was that she was a Highly Compensated Employee.

My question is, is there another way to sock away pre-tax Dollars for retirement savings? She isn't high enough in the management structure to be able to participate in a Deferred Compensation Plan.

Thanks.

[PensionPro]

1) If she is at least age 50 she may be able to defer $5,000 as catchup over the 6% limit depending on the employer's policies.

2) Talk to your tax professional about the possibility of deferring some retirement funds in an IRA. Or use the worksheet related to line 32 of Form 1040 to figure out eligibility for IRA deductions.

[JanetM]

I understand why you want to invest tax deferred, but what is wrong with having a taxable investment? Other accounts to address - emergency savings fund, college fund, long term care? Once you have the basics covered you can invest in taxable account. When the account is large enough you can invest in individual stocks & bonds.

[BG5150]

Is the plan using prior year testing? If not, I don't think the ER can legally do that, unless the plan is amended to hold all HCE's to x%. The company can recommend that the deferrals are reduced, but cannot mandate it.

[Blinky the 3-eyed Fish]

No, as far as the retirement plan goes the company can limit the HCE's as they see fit as long as they are following the plan document.

[BG5150]

No, as far as the retirement plan goes the company can limit the HCE's as they see fit as long as they are following the plan document.

So the plan document would have to say something like:

"The Employer can choose to limit the deferrals of HCE's if it so chooses" ?

But with the absence of such language, I would think it could not limit them (the HCE's), and certainly not an individual HCE's and not others.

[Kevin C]

That type of provision is pretty common. Our GUST prototype has the following included in the salary deferral contribution section:

...provided, that the Employer may impose reasonable limitations in a uniform, nondiscriminatory manner on the amounts which may be so contributed in order to satisfy applicable legal requirements and to assure the deductibility of amounts contributed by the Employer to the Plan and any other qualified plan of deferred compensation.

[buckaroo]

I have seen documents that state that the sponsor may limit the max deferral percentages based something outside of the plan (mandate, resolution). However, if the doc does not say this, then they cannot limit it by an exhibit outside of the plan.

[Guest pingilipkr]

I'm not sure if the plan is using prior year testing. Can someone explain in plain English whether we have sufficient cause to bring up this with HR? It seems unfair to exclude all HCEs with a blanket restriction like that.

[JanetM]

Of course you can bring it up to HR, your wife has the right (responsibility) to request and read the plan Summary Plan Description.

The point is, if the limit is not put in place and then plan fails ADP/ACP discrimination testing refunds will have to be made to you wife of the excess contributions.

We used to do this before we switched to safe harbor formula. We did preliminay test in July and normally cut all the HCEs off from additonal deferrals August 1. No only is it fair - using blanket restriction - it is required by the internal revenue code and ERISA for the purpose of testing. You only get two groups - highly and non-highly compensated.

[Bird]

Can someone explain in plain English whether we have sufficient cause to bring up this with HR?

In a word - "no." You can certainly ask if they've considered all the alternatives to simply limiting the HCEs, but it sounds to me like they're just doing their job. As noted, if they didn't limit the contributions going in, your wife would have to get money back and it would be taxable this year (probably) so it's all the same.

It seems unfair to exclude all HCEs with a blanket restriction like that.

Ah yes, we get that all the time. (I am a third party administrator advising plan sponsors so I am on the other side.) The reality is that the government has made an arbitrary distinction between "Highly Compensated Employees" and "Non-Highly Compensated Employees" and is only concerned that plans not favor HCEs disproportionately. You might find it interesting to know that the government does not care if your employer limits HCE contributions for all HCEs, in fact, it would be perfectly OK to limit them for your wife only. And, if there are employer contributions involved, such as match or profit sharing, it would be perfectly fine to limit them for HCEs as a group or individually (by amendment, not an arbitrary whim, just for the record). You've just scratched the surface of a labyrinth.

[david rigby]

You can certainly ask if they've considered all the alternatives to simply limiting the HCEs...

This is the key. It is reasonable to ask this question, but be prepared to get a simple "yes". Alternatively, the company may not have bothered to investigate the alternatives. In that case, the practioners on this messge board will be glad to offer some suggestions, or direct your wife's employer to a competent advisor.

(Sad to say, there are some "less than competent" advisors.)

[masteff]

As for your next step... easiest place to start is w/ Janet's suggestion about requesting a copy of the Summary Plan Description (SPD). Read it over, looking for where they reserve the right to limit all HCE's in a uniform manner. If you can't find it, then ask the HR/Benefits dept to point out the specific location where it says that.

If the SPD does not explain it in a reasonable way, then you'd want to pursue it further. You can always post back here w/ what the SPD says and we can give suggestions on where to go next.