HCE plan limits

[fiona1]

401(k) plan document allows the plan administrator to limit HCE deferrals. It states "The Plan Administrator may limit the amount of future Elective Deferral Contributions of the Highly Compensated Employees." And that is it.

Has the IRS ever issued rules around administrative limits to HCEs? For instance - does it have to be uniform? Can the employer limit John HCE to 6% of pay and Susie HCE to 5% of pay?

And are there rules around communicating the limit? Does it have to be written? Can the employer just communicate a limit verbally at an office meeting? What if John HCE is out ill on the day of the office meeting and he's never made aware of the limit.

This "administrative limit" has a direct impact on the ADP test. Assume John HCE makes $100,000 and is limited to 5% of pay. He can defer $5,000 - and then an additional $5,500 in catch-up contributions. The ADP will only reflect the $5,000 in deferrals.

[BG5150]

I would certainly put it in writing. Even if the people were at the meeting where they were told verbally. What's to stop an HCE from later coming back tot he company and stating that the company did not execute her salary deferral election correctly? It's there on paper she wanted 6%. Where does it say that she had to be cut back to 5%? I don't think "we mentioned it to her in a meeting" will cut it.

I wouldn't think you would have to send a memo to all the HCE's showing all the other HCE reductions (if any). Individual memos would be fine.

Dealing w/ HCEs I don't think it would have to be uniform. But then, you'd have to think about employee morale.

[Bird]

I would certainly put it in writing.

Especially if, as suggested, you want to use it as a way to determine catch-up contributions based on a plan limit. If challenged about why $5,500 of a $6,500 deferral is catchup, I don't think it flies to say "oh, we told him he could only put in $1,000."

To be honest, I'm not sure if that ability to limit is meant to be used as a "plan limit" that would create a catchup. At the very least I'd want it documented almost like a plan amendment or written implementation of that discretionary feature.

[david rigby]

.. does it have to be uniform?

I haven't checked the 401k regs. I think the general rule is that you can discriminate against, or among, HCEs.

[austin3515]

Our Corbel document says you can limit ALL HCE's based on the same limit (can't pick and choose) but this administrative limit needs to target passing the ADP test.

And yes, the limit does allow for catch-ups. So if you limit someonme making $245,000 to 5% of pay, they can contribute 5% of pay PLUS $5,500 and only 5% of pay is in the test. This is defintiely in EOB somewhere. I can find it if need be. It's a plan imposed limit AS LONG AS the document includes the kind of language I referenced above.

[MWeddell]

A profit-sharing plan (including a 401(k) plan) is supposed to have a definite pre-determined allocation formula. The plan document shouldn't (but often is) be worded so vaguely that you have employer discretion over how to limit HCE deferrals to ensure that the ADP test passes readily.

[austin3515]

As long as you have an opinion letter/determination letter, you should be OK.

[Earl]

On Jan 1, 2012 EE (HCE or not) had right to defer $17,000 for 2012.

Feb 15th you want to impose a limit for 2012?

I think there is a cutback problem there.

[austin3515]

I don't think so at all... Woudln't you agree you could prospectively amend the plan to exclude HCE's altogether?

[Mike Preston]

IAW Austin.

[austin3515]

TY (LOL)

[PensionPro]

Is it permissible to limit HCE deferrals to help pass the ABPT not the ADP test?

[austin3515]

Only if you're document sayus it is. I can't say why there is anything magical about the ADP test in this respect. The key is that it would have to be in the document.

[PensionPro]

Thanks AP, will check doc.