Advice for HCE - 401(k) limit dropped to 2% after firm decision to lose safe harbor

Jan 14, 2009 1 Replies

A local business is dropping their 401(k) match in an expense-cutting move. The match was the basis for the firm's HCE safe harbor.



Management has circulated a memo indicating that the contribution limit for 2009 for HCEs will be 2% and suggesting that HCEs open IRAs. HCEs were required to make the relevant election within 24 hours.



One of the HCEs has asked me whether the limit is reasonable. I have no idea. The limit looks conservative (it would pass the discrimination test if the non-highly compensated employees defer 1% or more), but I'm wondering if the limit might have been set artificially low to leave more pooled HCE contribution room for the Really Highly Compensated Employees.



I'm not a tax practitioner, realize that the question is naive and would appreciate any guidance or pointers to a good summary. Thanks for reading.


Not unheard of but unlikely. You can always get a copy of the plan documents and try to interpret these. There is not too much an employee can do about their employer's plan limits. I don't see where there's any decision-making required, other than for impacted individual employees to evaluate IRA's, HSA's, or more contributions to spousal or self-employed plans if they are available.

Steve

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