HEC thresholds/401K contributions

Submitted by inima23 t3_yfsvyb in personalfinance

Does anyone have experience with Highly compensated employees’ threshold for nondiscrimination testing? I'm having a difficult time understanding this process. It seems they look at the income for the previous year to determine if contributions can be made in the current year? Is that the case? So, if my income was not HEC in 2021, can I contribute the full amount in 2022 or will they distribute it back to me next year?

Thanks!

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[deleted] t1_iu51u7t wrote

[deleted]

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inima23 OP t1_iu52ifh wrote

Thanks, that was my understanding but wanted to make sure I'm understanding it correctly.

So now if my 2022 income is over the HCE limit, then I can't contribute in 2023?

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[deleted] t1_iu55mvy wrote

[deleted]

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inima23 OP t1_iu5emfb wrote

Ok, thanks. So basically I will only be able to contribute whatever the average percentage everyone else on the team is contributing, right?

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DaemonTargaryen2024 t1_iu560nb wrote

https://www.irs.gov/retirement-plans/identifying-highly-compensated-employees-in-an-initial-or-short-plan-year

https://www.investopedia.com/terms/h/highly-compensated-employee.asp

You may not be able to do much about it, but increased participation from all employees is a major factor. Part of the reason you see employer match and auto enrollment: good for those employees anyway but also good for HCEs by balancing the scales.

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inima23 OP t1_iu5jcyv wrote

Yeah, this is a small company without match and the owner has no interest in helping me figure this out. I've had disbursements sent back to me 2 years in a row and this year I'd like to contribute the full amount. It sounds like I should be able to since last year my income was under the threshold? This year my income will be over the threshold again, so I'm trying to confirm for sure that I can contribute this year, especially knowing that I won't be able to next year. Ughh, so confusing.

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tacotruck2112 t1_iu64smq wrote

If you earned less than $130k at that company in 2021 (and are not a 5% owner), then you are not HCE in 2022 and may contribute as much as you want up to irs limits.

If you will earn more than $135k in 2022 (and still not an owner), then you probably are an HCE in 2023 and may be limited in 401k next year. Generally, HCEs may contribute up to 2% of pay more (on average) than the average contribution rate of NHCEs.

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