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.