What Is the Maximum 401(k) Contribution for 2022 High Earners?

Author: Siân Killingsworth / 18 Apr 2022 / 401(k) Plan Information

If you are considered a Highly Compensated Employee (HCE) in 2022, your maximum 401(k) contribution is the same as anyone else’s–$20,500 plus an additional $6,500 in catch up contributions if you’re age 50 or older. Employers can contribute an extra $40,500 if the plan allows it.

However, employers will also need to consider annual nondiscrimination testing requirements for a fair and balanced plan, so they may not be able to contribute this maximum to highly compensated employees in the top 20% who make $135,000 or more.

What is a Highly Compensated Employee in 2022?

A Highly Compensated Employee in 2022:

• Owns more than 5% of the company at any time during 2021 or 2022
• Earns over $135,000 in 2022
• Falls in the top 20% of employees by compensation (if the employer makes a top-paid election)
• Earns “compensation” that includes paycheck income, overtime, bonuses, commissions, and any 401(k) salary deferrals

Examples of Highly Compensated Employees in 2022

The rules can be confusing because they depend on how the plan is drawn up. Here’s an example to consider.

In a ten-person small business:

• CEO Mary earns $500,000 and owns 90% of the company: HCE
• Brett earns $350,000 and no ownership: HCE
• George earns $200,000 and no ownership: HCE unless the company makes a top-paid election
• Jane earns $70,000 and owns 10% of the company: HCE
• Six other employees earning $40,000 or less: Not HCEs

Most of the time the rules are obvious, but some employees’ status is harder to determine. It depends on whether the employer elects for the top-paid rule to apply in order to pass their nondiscrimination assessment by reducing the number of individuals in the highly compensated group.

What’s Changed with 401(k) Plans from 2021-2022?

In many ways, 401(k) plans have changed since last year:

• The maximum employee contribution limit increased $1,000
• The maximum employer contribution limit increased $3,000
• The employee limit for calculating contributions increased $15,000
• The key employees’ compensation threshold for top-heavy testing increased $15,000
• The highly compensated employees’ threshold for nondiscrimination testing increased $5,000

There was no change to the catch up compensation amount.

How High Earners Impact a 401(k) Plan’s Compliance With ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law ensuring fair and equal opportunity access to company-sponsored retirement plans. Employers must pass annual nondiscrimination tests to show their plan benefits all employees—not just so-called “Highly Compensated Employees.”

Generally speaking, HCEs should contribute no more than 2% higher than the percentage Non-Highly Compensated Employees are contributing. So, if non-HCEs are putting in 5% of their combined salaries into the plan, the HCE group could contribute a maximum of 7% of their combined salaries.

What Can Employers Do to Save More in 2022?

Employers who personally want to save more in a small business retirement plan – and perhaps reward some of the top employees in their ranks – may consider adding a Safe Harbor provision and employer contributions to the retirement plan. By bringing up the combined total of the non-HCE group, HCEs will be able to contribute more to their plans.

What Can Employees Do to Save More in 2022?

Highly-Compensated Employees have other options to save for retirement aside from funding a 401(k) to the max. Individuals can put up to $3,650 into an individual Health Savings Account or $7,300 into a family HSA, plus an extra $1,000 if they’re age 50 or older.

High earners can also invest unlimited amounts into stocks, bonds, mutual funds, exchange-traded funds, and real estate investment trusts. Though they will have to pay capital gains taxes on the earnings and taxes on the money invested, the returns can certainly provide supplemental retirement income.

Contact Ubiquity to learn about different types of small business retirement plans so you can find one that best suits your needs. A small business 401(k) is affordable when you receive full administrative support for one low, affordable, transparent monthly fee that stays the same, even as your plan grows in participation or total balance.