Highly Compensated Retirement Contribution Options
January 2nd, 2007 | Published in 401K, IRA, Roth IRA | 6 Comments
When you’re a “highly compensated employee,” you’re limited in how much you’re allowed to contribute to your 401(k). You are limited because the government wants the playing field to be level and it’s “unfair” to lower compensated employees if more highly compensated employees contributions outstrip the percentage for the lower compensated employees. Whether or not it’s unfair is another issue but reality is reality. So, what is a highly compensated employee to do?
Contribute to an Individual Retirement Arrangement (IRA) instead. While you won’t be able to get an employer match on the money, you will be able to defer the taxes on the income until you actually retire. Traditional IRA’s are usually not a good idea for those of use who aren’t highly compensated because we are usually still eligible for a full contribution to Roth IRA and the contribution limits are shared by both. For example, if you contribute $1,000 to a Traditional IRA, then that’s $1,000 you cannot contribute to your Roth IRA because they share limits. However, if you are highly compensated, you are likely in the Roth IRA contribution phaseout range and so at least a partial contribution to a Traditional, whatever you can’t contribute to your Roth, makes sense because you can at least get some tax relief, since one is available by way of the 401K.
(This argument only applies for those who are classified as a highly compensated employee on an income basis, not on an equity basis)
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January 2nd, 2007 at 10:48 pm (#)
FYI: An HCE for 2006 and 2007 is someone who earns $100,000 or more. HCEs are not necessarily limited on their 401k contributions, only if the plan fails the discrimination testing.
March 22nd, 2007 at 1:19 pm (#)
I don’t consider myself as HCE even though I made over 100,000 last year because I live in the bay area. I can’t even aford a decent house here. Being a single mom with 3 kids, I am certainly not highly compensated. And the only reasons I made over 100,000 is I work overtime. Once again, we are being punish for hard-working.
March 22nd, 2007 at 4:41 pm (#)
Yeah, I don’t think HCE takes into account the cost of living… that’s a downer.
October 25th, 2008 at 6:26 pm (#)
As per guidelines, I am HCE. I haven’t enrolled for 401K yet for 2008, however, in coming 2 months I wish to make maximum contribution. Do I have option to contribute for my earlier pay period or I can just contribute for next 2 months?
Thanks
November 9th, 2008 at 7:58 pm (#)
My husband works for a small company and is a HCE. A low percentage of employees participate in the company’s 401K plan (he makes up 1/3 of the plans contributions). So the plan failed the discrimation testing. He has been maxing out his individual contribution and will not be able to any longer. To be sure to get atax deduction should he contribute to an HSA (the health plan is a High deductible plan)?
November 16th, 2008 at 11:47 am (#)
My 401k got cut also because i`m a HCE so i take off more time from work then haveing to pay more taxes. You know the gov can give out our tax dollars to bad banks but will not give the good working people a brake that is keeping them a flot.