HCEs and 401(k)

[BellaBee41]

Hi All,

We recently came across a situation at work regarding HCEs. Since I started working at this company last year, New Hire executives and above that are “considered” a highly compensated employee is excluded from participating in the plan, meaning those we hire with a salary over $155K for 2024. Per the IRS definition, determination depends on if the employee was a 5% owner in the current testing period or the 12 months preferring the testing period OR if they earned greater than $155K in 2024. Im our plan documents state that HCEs are excluded from the plan. My question is, should they be eligible to participate in the 401k plan as a new hire (assuming they meet the eligibility requirements for the plan)? And then in the following year for 2025, determine their eligibility based on their actual gross compensation for 2024? Just confused if we should be allowing them to enter the plan at all in their first year.

[Lou S.]

It would depend on how the exclusion in drafted in the Plan Document.

[EBECatty]

I think if the only exclusion is "HCEs" then they participate in their first year (assuming no immediate ownership). 

You could probably draft an additional exclusion along the lines of: "Any other employee reasonably expected to earn annualized compensation equal to or greater than the amount set forth in Code Section 414(q)(1)(B) in effect for the plan year."

As long as that doesn't cause you to fail coverage testing, should be okay.