Subscribe (Free) to
Daily or Weekly Newsletters
Post a Job

Featured Jobs

Retirement Plan Legal Specialist

Pentegra
(Remote / West Harrison NY)

Pentegra logo

Quality Assurance Manager

Bates & Company
(Remote / Winter Park FL)

Bates & Company logo

Attorney

Central Pension Fund of the IUOE
(Washington DC)

Central Pension Fund of the IUOE logo

Defined Benefit Calculation Specialist/Actuary

The Angell Pension Group, Inc.
(Remote / East Providence RI)

The Angell Pension Group, Inc. logo

Associate General Counsel

Central Pension Fund of the IUOE
(Washington DC)

Central Pension Fund of the IUOE logo

Executive Compensation Lawyer

Trucker Huss, A Professional Corporation
(Remote / San Francisco CA)

Trucker Huss, A Professional Corporation logo

Retirement Plan Consultant

Carpenter Morse Group
(Remote)

Carpenter Morse Group logo

Distribution \ Loan Clerk

Retirement, LLC
(Remote / Oklahoma City OK)

Retirement, LLC logo

Jr Retirement Plan Administrator/ Administrative Assistant

Hochheiser Deutsch & Co, Inc.
(Melville NY)

Hochheiser Deutsch & Co, Inc. logo

Relationship Manager

Compass Retirement Consulting Group, Inc.
(Remote / NH)

Compass Retirement Consulting Group, Inc. logo

Enrolled Actuary

Prime Pensions, Inc.
(Remote)

Prime Pensions, Inc. logo

Retirement Plan Relationship Manager

ERISA Services, Inc.
(Remote)

ERISA Services, Inc. logo

401(k) Distribution Manager

Nova 401(k) Associates
(Remote)

Nova 401(k) Associates logo

Retirement Plan Administrator

Nicholas Pension Consultants
(Remote / Corona CA / Rancho Cordova CA)

Nicholas Pension Consultants logo

Client Service Manager

United 401(k) Plans, Inc.
(Remote)

United 401(k) Plans, Inc. logo

View More Employee Benefits Jobs

Free Newsletters

“BenefitsLink continues to be the most valuable resource we have at the firm.”

-- An attorney subscriber

Mobile App image LinkedIn icon
Twitter icon
Facebook icon

BenefitsLink > Q&A Columns >

Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Effect of HCE Status on Deferrals

(Posted August 11, 2007)

Question 290: I have just moved to a new company and have increased my salary to $175,000. I assume that makes me a highly compensated employee (HCE). Has does that impact 401(k) contributions?

Answer: Your assumption is not immediately correct. I'll first address your situation from the standpoint of what the Internal Revenue Code provides and then discuss briefly the effect of your plan's document. As I do, I'll provide references to the 4th edition of my book, Who's the Employer?. (Subscribers can click to view online the text of these references.)

There are two ways to become an HCE: ownership or compensation. [Q 23:3.] To be an HCE by virtue of ownership, you must own (or be deemed to own) more than 5% of the employer. [Q 23:4.]

An HCE by virtue of compensation for a given plan year is an employee whose compensation during the previous plan year exceeded a threshold in effect for that year. The threshold started at $80,000 in 1997 and has slowly increased with changes in the cost of living. [Q 23:8.]

Your compensation is now well above the threshold. But what matters is that your compensation during the last plan year from this employer was $0. Therefore, you are not an HCE for the current plan year.

Next year will you be an HCE? Maybe, or maybe not. Let's suppose your employer has a calendar year plan. Five months of $175,000 salary is roughly $73,000, not enough to make you an HCE. So, you may have more than a year outside of HCE status. Of course, I have no idea what the plan year is for your employer's plan. Incidentally, some plans use the calendar year for this determination, regardless of the plan year. [Q 23:10.]

What happens in 2009? Certainly you will be over the compensation limit in 2008. Will that make you an HCE in 2009? Maybe, or maybe not. An employer can make a top 20% election. If the employer makes the election then only those employees whose compensation is in the top 20% of all employees can be an HCE by virtue of compensation. [Q 23:11.] In other words, if your company has enough people who earn more than you do, you may still not be an HCE.

What affect does that have on your ability to defer? The Internal Revenue Code has detailed nondiscrimination rules to make sure "the little guy" (the nonhighly compensated employees, or NHCEs) is getting enough benefit out of the retirement plan to justify providing tax benefits for the HCEs. One way the Code does this is with a nondiscrimination test for deferrals. If the HCEs are deferring a lot more than the NHCEs, then the employer either has to kick in more money for the NHCEs, or the plan must give some of the deferrals back to the HCEs. A plan doesn't have to do this test if the employer makes "safe harbor" contributions for the NHCEs. How will this impact you? In depends on the terms of the plan and how much your fellow employees defer.

Speaking of the terms of the plan, everything I've said so far has dealt with the law, but employers have a great deal of latitude as they adopt plan documents. So, you'll want to check with your HR department or read the summary plan description to find out about your situation.

Some plans limit the percentage of compensation HCEs can defer in order to prevent nondiscrimination problems. For example, if the NHCEs regularly defer only 4% of pay, the plan may limit HCEs to deferring 6% of pay. The only way to know is to check your document.


Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.


Copyright 1999-2017 S. Derrin Watson
Related links:

(restricted access)

(restricted access)

© 2023 BenefitsLink.com, Inc.