employer 401(k) contribution limit set at $12,500

[mosil]

I had been contributing 15% of my paychecks towards my 401(k). Last time I checked, it was at like $13,800 or something. Then, this paycheck, I noticed that it was a lot bigger than usual, so I went online and saw that they reverted money back to me from my 401(k) that was above $12,500.

I read my employer's retirement savings plan, and it does say: "You can contribute up to $16,500. If you are a highly compensated employee, you may contribute up to $12,500 for 2011."

I can't find anywhere that defines "highly compensated", but so far I have made about $130,000.

I have two questions:
1) Are they allowed to do this? Why?
2) Is there any way I can make up for the "lost" $4000 elsewhere? Open a solo 401(k) or something?

thanks!

[jpg7n16]

Originally Posted by mosil

I had been contributing 15% of my paychecks towards my 401(k). Last time I checked, it was at like $13,800 or something. Then, this paycheck, I noticed that it was a lot bigger than usual, so I went online and saw that they reverted money back to me from my 401(k) that was above $12,500.

I read my employer's retirement savings plan, and it does say: "You can contribute up to $16,500. If you are a highly compensated employee, you may contribute up to $12,500 for 2011."

I can't find anywhere that defines "highly compensated", but so far I have made about $130,000.

I have two questions:
1) Are they allowed to do this? Why?
2) Is there any way I can make up for the "lost" $4000 elsewhere? Open a solo 401(k) or something?

thanks!

Highly Compensated Employee Definition


1) If it's in the plan documents, they likely can. As to why, you'd have to check with your plan administrator.

2) You may be able to contribute to either a traditional or Roth IRA. If you are filing joint, you qualify for a Roth. And you may be able to deduct a Traditional IRA contribution to a spousal IRA if spouse is not covered by a qualified plan at their job (or is not employed). Should likely check with a CPA to evaluate your situation on that.

You cannot open a Solo 401k plan, SEP IRA, etc. as you are not self-employed.

[Petunia 100]

Originally Posted by mosil

I had been contributing 15% of my paychecks towards my 401(k). Last time I checked, it was at like $13,800 or something. Then, this paycheck, I noticed that it was a lot bigger than usual, so I went online and saw that they reverted money back to me from my 401(k) that was above $12,500.

I read my employer's retirement savings plan, and it does say: "You can contribute up to $16,500. If you are a highly compensated employee, you may contribute up to $12,500 for 2011."

I can't find anywhere that defines "highly compensated", but so far I have made about $130,000.

I have two questions:
1) Are they allowed to do this? Why?
2) Is there any way I can make up for the "lost" $4000 elsewhere? Open a solo 401(k) or something?

thanks!

Sounds to me like your plan is close to being "top heavy". When not enough rank and file type employees aren't contributing, or aren't contributing enough, the plan gets top heavy (more than 60% of plan assets belong to key employees). When that happens, the company has to make additional contributions to the rank and file who are eligible to participate, whether they do or not, over and above any matching. Failing to do so can result in the entire plan being disqualified. They are merely trying to avoid being top heavy.

[Like2Plan]

Originally Posted by mosil

I had been contributing 15% of my paychecks towards my 401(k). Last time I checked, it was at like $13,800 or something. Then, this paycheck, I noticed that it was a lot bigger than usual, so I went online and saw that they reverted money back to me from my 401(k) that was above $12,500.

I read my employer's retirement savings plan, and it does say: "You can contribute up to $16,500. If you are a highly compensated employee, you may contribute up to $12,500 for 2011."

I can't find anywhere that defines "highly compensated", but so far I have made about $130,000.

I have two questions:
1) Are they allowed to do this? Why?
2) Is there any way I can make up for the "lost" $4000 elsewhere? Open a solo 401(k) or something?

thanks!

They are raising the amount for HCE in 2012 to 115,000 (for testing for the 2013 plan year) IRS Releases 2012 Highly Compensated Employee Limits , but you will still exceed it.

If you get an employer match, you should reduce your contribution level (for next year) so that you don't max out prior to the end of the year and possibly lose the match.

[Slug]

They are doing this because your company likely fails their ADP/ACP tests if they don't. My company does too, but they don't cap contributions. So, instead of your situation, I get a check the following year for contributions made in the prior year. It's usually several thousand dollars, and it is taxed as income in the current year. It's very painful for me to see my contributions returned.

[Slug]

Originally Posted by Like2Plan

If you get an employer match, you should reduce your contribution level (for next year) so that you don't max out prior to the end of the year and possibly lose the match.

Most companies match based on the overall percentage contributed, not on a paycheck to paycheck basis, but Like2Plan is correct that you should check to make sure your company doesn't go the paycheck to paycheck route.

[simpletron]

You should encourage non-highly compensated employees to contribute more to their 401K, because thier contribution rate limits yours.

[MonkeyMama]

Originally Posted by mosil

1) Are they allowed to do this? Why?

They have to do this. This is pension law under ERISA. Others have explained why. $130k is definitely a HCE (highly compensated employee).

[graceful]

Originally Posted by Slug

They are doing this because your company likely fails their ADP/ACP tests if they don't. My company does too, but they don't cap contributions. So, instead of your situation, I get a check the following year for contributions made in the prior year. It's usually several thousand dollars, and it is taxed as income in the current year. It's very painful for me to see my contributions returned.

Originally Posted by simpletron

You should encourage non-highly compensated employees to contribute more to their 401K, because thier contribution rate limits yours.

Originally Posted by MonkeyMama

They have to do this. This is pension law under ERISA. Others have explained why. $130k is definitely a HCE (highly compensated employee).

AGREED. DH actually doesn't make the IRS definition of HCE based on his salary. DH contributes the max but in years where bonuses were given (not for a while now) and not enough people contributed to the 401K, he got a check the NEXT year as income for the "excess" he put in the 401K the year before which could then bump him up to a HCE again for the new year.

Neither DH or the company knows if this will happen from year to year until AFTER 12/31 when all the numbers are in and their payroll company lets them know.

So, the fact that you know early is a small advantage, depending if you would have preferred to have deferred the income to the next year.

It can be very vexing.

[Slug]

Originally Posted by graceful

Neither DH or the company knows if this will happen from year to year until AFTER 12/31 when all the numbers are in and their payroll company lets them know.

It can be very vexing.

I actually don't believe this. It is projectable. Although employees can always adjust their withholding up or down, the vast majority set it and forget it. With that assumption in place, they can run the numbers and give you a likelihood that money will be kicked back. Most are just too lazy to do the work.

[MonkeyMama]

Originally Posted by Slug

I actually don't believe this. It is projectable. Although employees can always adjust their withholding up or down, the vast majority set it and forget it. With that assumption in place, they can run the numbers and give you a likelihood that money will be kicked back. Most are just too lazy to do the work.

Um, it's not quite that simple. Companies pay retirement plan administrators big bucks to do all of these calculations after the end of the year, to make sure everything is kosher. I have personally never heard of a company running projections ahead of time (though I only have worked with certain kinds of companies). Problem is that it increases the expenses of the retirement plan, and those costs are usually passed on to the employees in the plan.

Needless to say, it can get extremely complicated. Though there may be some instances where advanced projections make sense, it's not terribly practical.

That said, if you have ever been subject to reduced contributions as an HCE, I think it's safe to assume that it will probably happen every year. Just be pleasantly surprised when it doesn't happen.

[graceful]

Originally Posted by Slug

I actually don't believe this. It is projectable. Although employees can always adjust their withholding up or down, the vast majority set it and forget it. With that assumption in place, they can run the numbers and give you a likelihood that money will be kicked back. Most are just too lazy to do the work.

Originally Posted by MonkeyMama

Um, it's not quite that simple. Companies pay retirement plan administrators big bucks to do all of these calculations after the end of the year, to make sure everything is kosher. I have personally never heard of a company running projections ahead of time (though I only have worked with certain kinds of companies). Problem is that it increases the expenses of the retirement plan, and those costs are usually passed on to the employees in the plan.

Needless to say, it can get extremely complicated. Though there may be some instances where advanced projections make sense, it's not terribly practical.

That said, if you have ever been subject to reduced contributions as an HCE, I think it's safe to assume that it will probably happen every year. Just be pleasantly surprised when it doesn't happen.

I think that the company usually has "an idea" by running preliminary numbers that it is very likely that some employees will be getting a check back next year. But until we actually get it...

Things also depend on whether or not bonuses will be given out. NO ONE knows if we get bonuses except the boss until the Christmas party when it is given out. Last year it was suppose to be given out (if any) the week AFTER the party and guess what? No bonuses that year.