401k HCE limit as a fraction

[TPApril]

While restating a plan document prepared by another service provider, I see a limit on the rate of 401k for HCE's of the current dollar limit divided by the Comp limit.

Considering that the ADP test takes into account discrimination issues, what would be the purpose of this limit?

[Bri]

It's to keep some HCE from terminating early in the year with all 20,500 deferred but maybe only 60,000 in wages earned to date making a mess of the test and causing ALL the 20,500 people for the year to have to take a refund.

[TPApril]

Fair enough, but is it appropriate in a small plan where the only HCE's are the owners?

[CuseFan]

probably not necessary unless some are over comp limit and others under. that way each is limited to same max % rather than same dollar amount. example above, but assume the $60k HCE was owner's son.

if small plan, consider SH and avoid that worry altogether.