At what threshold $ amount are "highly compensated employees&quot

[Guest Dan Zevitz]

Please forgive the remedial question, but benefits is not my strong point.

With respect to 401K plans and "highly compensated employees," I have been told that the limit at which the $10,500 amount can be maxed out is 85K. However, does that mean that employees earning 85K or more are eligible at the lower contribution rate, and if so what is it, or is it $84,999.99 for the limit before the lower contribution standards apply? I have an employee that earns 85K, and I was wondering if we did him a disservice raising him that extra dollar. If he overpays what happens to the extra money?

Thanks,

Dan

[Guest]

in a calendar year (not necessarily a plan year) anyone in the country can defer up to 10,500. you can be in ore than 1 plan, you can work for more than one company, etc.

you send in your W-2s at tax time and the govt can add up the total deferrals and make sure you haven't exceeded the 10,500 (which will probably be 11,000 in 2002)

There is an annual addition limit as well (per company) which is 25% of pay, so an individual making 40,000 for company A could only defer 40,000 * 25% = 10,000 rather than the 10,500.

The 85,000 limit you are talking about only refers to who is an HCE 'highly compensated'. This can effect testing, and if the test fails, then deferrals are returned, which in effect limits the amount an ee can defer.

actually, an ee making 85,000 is not an HCE, an ee making 85,000.01 would be an HCE.

There is also an option of using what is called the top paid group, so it is not necessarily true than every ee making 85,000 would be considered an HCE!

regardless, if the person you are talking about owned more than 5% of the company, he would be an HCE no matter what.

hopefully whoever is servicing your plan can take the time to further explain things than I can in a brief message like this.

again, there is no 'limit' based on the compensation you paid him (or her as the case may be) however, if the plan fails testing, then there will be a refund of deferrals - and not necessarily to that particular HCE, unless of course he did indeed defer the total 10500.

[rcline46]

Your source if information is WRONG, WRONG, WRONG. Strong message to follow!

The 402 limit is 10,500, the 415 limit is 25% of pay, and the document limit is??? percent of pay. So you get to contribute the lessor of 25% of pay which means 10,500 at $42000 of pay not 85000, the percent specified in the document - usually 15% of pay which is 10,500 at $70,000, or the 402 limit (10,500) so at $170000 of pay it is only 6.176% of pay.

If you are Highly COmpensated (making over 85k in 2000) you get these same limits. However, the the non-highly compensated (NCEs) average deferrals is not great enough, the HCE may have to have deferrrals returned due to failure of the 401(k) ADP test.

You or your source need to 'bone up' on the testing rules.

[Guest RJM]

Dan: Simple math (roughly alluded to above): Divide $10,500 by the maximum deferral percentage permitted by the Plan. That determines the Compensation needed to achieve the annual dollar limit for an individual.

Except for ADP-Safe Harbored plans (a fairly new concept), Highly Compensated Employees (HCEs) may not be able to defer the $10,500 due to ADP testing limitations. Or if they do defer and the plan fails the ADP test, the HCEs will most likely recieve a refund of 'excess contributions'.

Besides the 5% owner requirement, $85,000 is the year 2000 dollar benchmark used to determine who is a HCE for Plan Years beginning in 2001. If (in 2000) the number of individuals making over $85,000 is greater than 20% of the total (2000) workforce, the number of HCEs (in 2001) may be reduced.

Most likely you won't find this in your current plan documents as very few plans have been updated (post-1996) for the new HCE definitions. However, your plan provider should be able to furnish you with a copy of the new rules. [it seems that your plan provider is falling down on the job if you have to resort to a forum to find these answers.]