Options for HCEs

[Guest Curiousgeorge]

My employer offers a simple 401k plan with a profit sharing component (no company match). I was just informed, along with several others in the company, that we stand to fail the non-discriminatory testing for this year. If I don't stop contributing immediately, I will be forced to take a refund from the plan. In fact, it may already be too late for me to avoid this.

Due to lack of adequate participation in the plan, the threshold for the plan to fail the non-discriminatory testing is very low (only about 6% of my salary before taxes). I am approaching 50 and was hoping to take advantage of pre-tax savings in my 401K to save even more with catch-up contributions. Now, it looks like I won't even be able to get halfway to the annual max - let alone any catch up contributions. When I approached my HR department to inquire about the company converting to a Safe Harbor 401K I was told that they will not do this because they do not want to be forced to make mandatory contributions each year.

So, I have two questions:

First, do I and other HCEs have any legal recourse here ?

Second, short of finding another employer with a better 401K plan, can you suggest any options for people in my situation who need to invest substantial after tax income in order to adequately prepare for retirement ? I am considering options like Roth IRAs (I am still under the max income threshold - married filing joint). But, I understand the max I can contribute to a Roth IRA is still only $5,500 annually for 2013. This is still way short of what I was looking to save. I am looking for options with the little or no tax implications and high potential rates of return to compensate for what I am loosing due to forfeiture of so much pre-tax savings capability.

Thanks for any insight you can provide.

[ESOP Guy]

You have no legal recourse. The limits are the law.

The only thing I can think of to add to the savings if you have a HSA it has a catch up provision so you could max that out also.

I beleive the IRA has a $1,000 catch up also.

I would always suggest putting in the max 401(k). If you get a refund so be it that way you know at least you have put the max in. If it turns out you stop and you could have put in more you can't go back and fix that.

[ETA Consulting LLC]

Don't forget you can also fund a spousal Roth IRA (or maybe even a spousal deductible traditional IRA) depending on your income level. This may give you an additional $5,500 for 2013.

Good Luck!

[401king]

Encourage your employer to hold an educational retirement plan seminar in hopes of getting more Non-HCEs to contribute, or increase their contributions. You'll have a tough time convincing them to do Safe Harbor as that can be extremely costly.

As others have recommended, just max-out your 401k contributions to the most you can afford - then take the refund after year-end. At least that way you know you got the maximum value out of the plan. Sometimes people try to base current year contributions on last year's discrimination test results, although the results can swing wildly each year (depending on the size of your company).

[david rigby]

Depending on how the plan is worded, you should be able to make catch-up contributions.

[GMK]

Here are a couple of the several discussions about how you may be able to make catch-up contributions if you hit a statutory or plan contribution limit (subject to plan wording).

http://benefitslink.com/boards/index.php?/topic/52976-catch-up-rechartization-after-failed-adp/

http://benefitslink.com/boards/index.php?/topic/53065-dc-415-limit-with-catch-up/

[Bird]

Just invest on an after-tax basis in mutual funds or individual stocks. I'm in the business, but the benefits of 401(k)s are oversold, IMO. Remember that you are deferring taxation to a later date, ultimately at ordinary income tax rates. If you invest in stock funds or stocks directly, you won't get an up-front deduction, but some of the gains will be deferred, and eventually taxed at capital gains rates (generally lower than ordinary income rates - or 0% if held until death).

[BG5150]

You'll have a tough time convincing them to do Safe Harbor as that can be extremely costly.

If no one really wants to participate, the SH Match could be quite cheap. Get ya out of Top Heavy, too, if there is no PS.

[GMK]

^ if you add the SH Match, they will come (most likely).