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Highly Compensated Employee and 401k Limits

A 401k Plan Enables Business Owners and their Employees to Save for Retirement.

Business owners and other high earners often try to accelerate their retirement savings by maximizing contributions to their 401k plan as permitted by the IRS. If they are age 50 or older, they may be able to contribute as much as $62,000 (for 2019). Some highly compensated employees, or “HCE”s for short, are unable to maximize their contributions, however, if lower paid workers are not saving aggressively in their 401k plan.

What is a highly compensated employee?

Who do these additional HCE 401k limits apply to? The income threshold may be lower than you think, especially if you live in a place with a high cost of living, like San Franciso or New York.

You are considered a “highly compensated employee” for 401k plan purposes if you earn $125,000 or more per year or own more than 5% of the company.

If you meet either of these requirements, you may be affected by these rules, depending on the salaries and saving rates of the employees who participate in your 401k.

Here are some important things to note about the HCE designation:

  • If you own 5% of the company you are not considered a Highly Compensated Employee and are not subject to their 401k limits. You have to own more than 5% of the company.
  • If you do own more than 5% of the business, you’re an HCE regardless of what you earn.
  • You can be an HCE and not even realize it, due to family attribution rules!
    • Under Internal Revenue Code Section 318, an individual is deemed to own what their spouse, children, grandchildren, or parents own. If Gerard owns 100% of a business, his wife, Natalie, is deemed, by the IRS, to also own 100% of that business. Therefore, Natalie is an HCE and a key employee even though she owns none of the business in her own right.
  • Your Highly Compensated Employee status is not permanent. If a worker’s income fluctuates, they may be considered an HCE one year, but not the next.

Fortunately, even if you stuck with an HCE designation, there are still plenty of methods for high earners to save for retirement.

Annual 401k limits for HCEs

Salary deferral limit

Under the 401k contribution rules, business owners and employees may deduct a portion of their pay and have it deposited into their 401k account as a pre-tax contribution. The amount contributed to the 401k will not be included in taxable income until the dollars are distributed from the plan – hopefully during their retirement years. If a 401k allows Roth contributions, some or all of these contributions may be made as after-tax Roth contributions. No matter which type of contribution is made, there is one maximum 401k limit per person – $19,000 for 2019.

If an individual defers more than $19,000 for 2019, the business owner must distribute the excess amount plus earnings to the individual. This is a taxable distribution (unless the salary deferrals were made as Roth contributions).

401k catch-up

Almost all 401k plans accept “catch-up contributions.” These are salary deferral contributions made by owners and employees who are age 50 or older, who maybe need to “catch up” on their retirement savings. An additional salary deferral of up to $6,000 can be made as a catch-up contribution on top of the maximum annual salary deferral ($19,000 for 2019).

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Nondiscrimination test limit

Business owners and highly compensated employees may not be permitted to contribute the full salary contribution amount each year

If lower paid employees in the 401k plan are not making significant contributions. 401k plans must pass certain nondiscrimination tests each year to demonstrate that the plan is not discriminating against lower compensated employees.

These tests limit the:

  • Percentage of compensation that HCEs can contribute to the 401k based on the average percentage contributed by the non-highly paid employees
  • Amount of employer matching contributions (and any non-Roth after-tax employee contributions) that may be contributed for highly paid employees.

If a 401k plan fails these tests, the business owner must either return a portion of the HCEs’ contributions or make additional contributions for the lower paid employees.

Compensation limits

To prevent disproportionately large contributions for HCEs, the 401k plan rules place a limit on the amount of compensation that may be considered when calculating an employer matching contribution or other contribution that is based on a percentage of compensation.

For 2019, this limit is $280,000.

For example, assume you earn $300,000 for 2019. The 401k plan includes an employer matching contribution of up to 3% of your compensation. Under these “compensation cap” rules, your employer could make a matching contribution of up to $8,400 (3% x the compensation cap of $280,000) – not $9,000 (3% x your full compensation of $300,000).

Strategies for HCEs and business owners

Business owners and HCEs may be able to increase the amount they can contribute to a 401k plan through one or more of these strategies.

401k catch-up contributions

Catch-up contributions are made after an individual reaches the $19,000 (for 2019) annual salary contribution limit or a plan-imposed limit (e.g., a failed nondiscrimination test). Because catch-up contributions are not included in nondiscrimination testing, even if you cannot make the full $19,000 salary contribution because of limits imposed by a plan test, you will still be able to make a catch-up contribution, up to $6,000, if you are age 50 or older.

Increase lower-paid employees’ savings rates through education

If lower paid employees increase their saving rates, HCEs and business owners will be able to make larger contributions. To encourage employees to save more in the 401k, employers may want to engage financial advisors or other service providers to educate employees about the benefits of saving in a 401k and helping workers calculate how much they need to save to reach their financial goals in retirement.

Adopt a Safe Harbor 401k Plan

If you adopt a Safe Harbor 401k plan, it will be deemed to pass these nondiscrimination tests, meaning the owner and other HCEs can contribute any amount up to the annual salary contribution limit, plus catch-up contributions if eligible, without worrying about the contribution rate of lower paid employees. Offering a Safe Harbor 401k plan may also help improve participation and savings rates for all employees.

2019 Retirement Plan Limits

It can be difficult to stay up to date with annual changes in 401k limits, along with all the other kinds of retirement vehicles you may be saving in. That’s where the experts at Ubiquity come in. Remember every plan is designed differently, so it’s important to refer to your Plan Document for any compensation or other applicable limits.

Download our 2019 contribution guide

401(k) and 403(b) individual contribution limits (IRS 402(g) Limit)

2018

2019

Age 49 and under

$18,500

$19,000

Age 50 and older

Additional $6,000

Additional $6,000

Highly Compensated and Key Employee definitions and limits

2018

2019

Key Employee Officer Compensation

$175,000

$180,000

Highly Compensated Employee

$120,000

$125,000

Annual Compensation Limit

$275,000

$280,000

Roth and Traditional IRA contribution limits

2018

2019

Age 49 and under

Up to $5,500 (must have earned income)

Up to $6,000 (must have earned income)

Age 50 and older

Additional $1,000

Additional $1,000

Traditional IRA modified adjusted gross income limit for partial deductibility

2018

2019

Single

$63,000 – $73,000

$64,000-$74,000

Married – Filing joint returns

$101,000 – $121,000

$103,000 – $123,000

Married – Filing separately

$0 – $10,000

$0 – $10,000

Non-active participant spouse

$189,000 – $199,000

$193,000 – $203,000

Roth IRA modified adjusted gross income phase-out ranges

2018

2019

Single

$120,000 – $135,000

$122,000 – $137,000

Married – Filing joint returns

$189,000 – $199,000

$193,000 – $203,000

Married – Filing separately

$0 – $10,000

$193,000-$203,000

Simple IRA contribution limits

2018

2019

Age 49 and under

$12,500

$13,000

Age 50 and older

Additional $3,000

Additional $3,000

Health Savings Accounts (HSA) contribution limits

2018

2019

Individual (employer + employee)

$3,450

$3,500

Family (employer + employee)

$6,900

$7,000

Age 55 or older**

Additional $1,000

Additional $1,000

If you need more detailed guidance on 2019 IRS limits, see IRS Notice 2018-83.

Learn more

If you’re a small business owner and need a 401k plan for yourself and your company, only Ubiquity offers flat-fee plans plus free expert advice. We’ll fully customize your 401k to meet the specific needs of your small business.

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© 2019 Ubiquity Retirement + Savings
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44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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© 2019 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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