401(k) max question

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401(k) max question

Postby Anonymous User » Sat Feb 24, 2018 3:10 pm

I was just reading something about highly compensated employees having limits on 401(k) contributions. Do I have to worry about this? The HCE salary is 120k. Not sure how it all works, but everyone on here always talks about maxing contributions, so I don’t think I have to worry. But could someone please explain why?

My firm has two different plans, one for associates and one for partners/staff, I think,

LHS17

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Re: 401(k) max question

Postby LHS17 » Sat Feb 24, 2018 3:57 pm

Anonymous User wrote:I was just reading something about highly compensated employees having limits on 401(k) contributions. Do I have to worry about this? The HCE salary is 120k. Not sure how it all works, but everyone on here always talks about maxing contributions, so I don’t think I have to worry. But could someone please explain why?

My firm has two different plans, one for associates and one for partners/staff, I think,


This is a very easy topic to google. That said, unless you're living somewhere like New York, you should really try to put away the $18,500 maximum per year. They deduct this from your gross salary so the short-term hit on a net basis is more like $1k per month. As to why? Compounded returns.

At a bare minimum, you should absolutely contribute any amount the employer is willing to match. That equates to a 100% return on investment, which would be a wild annual return in any market.

Hutz_and_Goodman

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Re: 401(k) max question

Postby Hutz_and_Goodman » Sat Feb 24, 2018 4:19 pm

Agree with the above and I think maxing the 401k is the right decision even without employer match if you can afford to do this.

Anonymous User
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Re: 401(k) max question

Postby Anonymous User » Sat Feb 24, 2018 4:41 pm

Think I should clarify my question.

I know how 401k generally works but read somewhere that HCE are limited to a certain %. How do all these associates max out then if they’re considered HCE? Do firms just give low-paid staff insane profit sharing to make up for the difference?

LHS17

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Re: 401(k) max question

Postby LHS17 » Sat Feb 24, 2018 5:34 pm

Anonymous User wrote:Think I should clarify my question.

I know how 401k generally works but read somewhere that HCE are limited to a certain %. How do all these associates max out then if they’re considered HCE? Do firms just give low-paid staff insane profit sharing to make up for the difference?


I don't really understand the question, but I was able to put away $18,500 working at an investment bank making well in excess of that.

Any percentage my employer communicated to me related to company match, which is discretionary.

dtlaatty

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Re: 401(k) max question

Postby dtlaatty » Sat Feb 24, 2018 6:51 pm

I've never heard of this. The $18,500 limit is not linked to income. Are you thinking of the tax deduction phase-out for IRAs?

Anonymous User wrote:Think I should clarify my question.

I know how 401k generally works but read somewhere that HCE are limited to a certain %. How do all these associates max out then if they’re considered HCE? Do firms just give low-paid staff insane profit sharing to make up for the difference?

sucsuroc

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Re: 401(k) max question

Postby sucsuroc » Sun Feb 25, 2018 10:19 am

Anonymous User wrote:I was just reading something about highly compensated employees having limits on 401(k) contributions. Do I have to worry about this? The HCE salary is 120k. Not sure how it all works, but everyone on here always talks about maxing contributions, so I don’t think I have to worry. But could someone please explain why?

My firm has two different plans, one for associates and one for partners/staff, I think,


While you are correct that you are an HCE, that's only the first step of the analysis. So long as HCEs don't defer considerably more of their income than non-HCEs (specifics of the test are in the links below), your contributions are not limited. This is a plan-level compliance issue and your firm is, or should be, monitoring it. In the unlikely event that they mess this up, they'll return excess contributions to you.

Note that in the case of your firm, associates are all part of the same plan and, assuming your firm pays market, every member of that plan is an HCE. This would seem to make it difficult to fail the tests.

https://www.irs.gov/retirement-plans/40 ... tion-tests
https://www.irs.gov/retirement-plans/pl ... efinitions
http://www.401khelpcenter.com/401k_educ ... rules.html



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