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HCE 401k Question

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  • Avatar ID Doc 
    Participant
    Status: Physician
    Posts: 60
    Joined: 02/23/2017

    I’m not at all convinced that who I’ve been able to reach in my HR knows anything about this, so hoping someone here can check my understanding on this and answer a few questions.

    Quick background: finished fellowship in June 2017 and started at current employer in late July 2017, current employer started offering a 401k in 2018. My 401k works for a Mega Backdoor Roth.

    In mid-2018, I started contributing to the After-tax portion of my 401k. In November 2018, I rolled a bit over $15,000 from it to my Roth IRA at Vanguard. On 1/18/19, I got a notification from TransAmerica confirming the change in my After-tax contributions from 13% (where I had set it previously) to 2%. I hadn’t made the change. Wondering if it was a highly-compensated employee issue, I looked up the Summary Plan Description, and it says that after-tax contributions from highly compensated employees cannot exceed 2% of compensation. I’ve received no formal communication stating this is why, but eventually got someone at HR/TransAmerica to agree that it seemed like that was what happened. It seems I’m still able to max out the pre-tax side.

    Questions:

    1. Will the contributions I made in 2018, as they were over 2% of compensation, be disallowed in some way? (From what I’ve read, it looks like the HCE designation for the current year is based on the prior year’s earnings. Before starting the Mega Backdoor Roth IRA process in 2018, I had actually called to specifically inquire about this, and was told I wasn’t classified as one. I’m now guessing that since I only worked as an attending for about 5 months in 2017, that kept my earnings low enough to not be classified as one for 2018. So I’m hoping that means anything I did in 2018 is ok.)

    2. My first two paychecks in 2019 still had 13% taken for After-tax 401k contributions. The 3rd one (coming out tomorrow but I can see the stub now) is now lowered to 2%. Do I need to stop After-tax contributions for a while to make sure I don’t get over 2% total for the year? What would happen if I just left it at 2% and ended over for the year?

    3. Am I ok to transfer anything in the After-tax portion now (currently a bit over $6,000) to my Roth IRA at Vanguard?

    4. Anything else I need to do now or be thinking about?

    Thanks so much in advance for any advice.

    #189160 Reply
    Avatar ID Doc 
    Participant
    Status: Physician
    Posts: 60
    Joined: 02/23/2017

    Update:

    I finally got to someone in my HR who seemed like they knew what I was talking about. Her answers to my questions were as follows:

    1. She said I was understanding the HCE designation correctly (current year designation based on prior year’s earnings). She said she was “99.9% sure” that everything I did in 2018 should be fine since I wasn’t classified as an HCE then, however she said she couldn’t be 100% certain until they completed the non-descrimination testing, which should be done by the end of March.

    2. She said I didn’t need to worry about staying at/under 2% total for the year. She said they cap HCEs at 2% so they don’t fail non-descrimination testing, but that they’re not looking at each individual to ensure that. So, while I can no longer elect to go above 2%, the first two paychecks that got through at 13% is still ok.

    Does this sound right?

    I’m thinking I might hold off on any further transfers to my Roth IRA until I confirm there are no surprises from the non-descrimination testing, as I can’t imagine it’s going to be straightforward to get my money back to the 401k from Vanguard if they somehow decide that they need to refund some of it to me.

    #189391 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1610
    Joined: 02/01/2016

    I would wait until they complete the 2018 after-tax ACP testing before transferring any more 2018 contributions and earnings to a Roth IRA.

    It is true that the testing is not done on individuals, but rather the separate average of all HCEs and all NHCEs. However, if they fail ACP testing, your extra 2019 contributions might be returned to you in March 2020. I would roll these current 2019 contributions over, but you might want stop rollovers later in the year until you get a better picture of where you are at.

    #189413 Reply
    Avatar ID Doc 
    Participant
    Status: Physician
    Posts: 60
    Joined: 02/23/2017
    Earnest refinancing bonus

    Thanks so much for the reply! I looked it up, and here’s what it looks like:

    Total 2018 After-tax contributions: $19,005.48
    2018 After-tax withdrawals: $15,134.60 (Rolled to Vanguard Roth IRA)
    2019 After-tax contributions thus far: $2,371.18

    With the 2% cap, I would expect about another $4,000 After-tax contributions for the remainder of 2019.

    If I’m understanding you correctly, it sounds like I could safely transfer the remainder of the 2018 contributions ($3,870.88) to my Roth IRA once ACP testing is complete this year around March or April. Is this correct?

    For 2019, it looks like the extra contributions above the 2% would be a bit under $2,000. So if I leave $2,000 from 2019 in there, that would be the maximum that they would need to return to me in 2020 if they fail the 2019 testing? (I would probably roll what’s there now and then again sometime mid-year, and could let the $2,000 build back up over the last half of 2019).

    #189417 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1610
    Joined: 02/01/2016

    You are correct and have a good understanding of your situation. You should be able to get the results of the 2018 ACP testing even if your employer passes.

    The average Non-HCE and average HCE contribution percentages may be interesting. As is the HCE calculated allowed ACP, but it is the calculated correction percentage limit that matters. Amounts > this limit are what are returned to get the HCE ACP down to the calculated allowed ACP.

    For a 401k plan to have a 2% prospective HCE ACP limit means the NHCEs are making little to no employee after-tax contributions

    #189454 Reply
    Avatar ID Doc 
    Participant
    Status: Physician
    Posts: 60
    Joined: 02/23/2017

    Got it, thanks. 2018 was the first year for the 401(k) (there was a 403(b) with no matching previously), so I imagine they’re being conservative to ensure they pass testing until they see what people do. Although I imagine most NHCEs would max out the pre-tax or Roth 401(k) before they would use the After-tax component, and doubt there are many people making less than $125,000 that are looking to contribute more than $25,000 to retirement accounts (I imagine most would use $19,000 401(k) and $6,000 Roth IRA before using the After-tax 401(k)). Could be wrong, but if I’m understanding correctly, I’m not that hopeful they’ll increase my After-tax cap to more than 2% in the future.

    Now I’m trying to figure out if we have a safe-harbor 401(k) such that my pre-tax contributions (maxed out) would be safe pending the testing. My employer matches 100% of contributions up to 4% of salary, and gives an additional 1% of salary, regardless of contributions. Does that sound like one?

    #189496 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1610
    Joined: 02/01/2016

    The match qualifies, but there are other safe harbor requirements. The biggest one would be that all employer contributions vest immediately. If those two are true it is 99%+ likely it is a safe harbor plan.

    #189525 Reply
    Avatar ID Doc 
    Participant
    Status: Physician
    Posts: 60
    Joined: 02/23/2017

    Looked it up. The 4% match vests immediately – on the new plan documents, they actually call it a “Safe Harbor Match.” It looks like the 1% non-elective contribution vests after 3 years of service, though.

    So if all employer contributions have to vest immediately, maybe not. Guess I’ll find out soon enough. Thanks so much for your help!

    #189538 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1610
    Joined: 02/01/2016

    I mistated the safe harbor vesting requirements. Safe harbor matches or non-elective contributions must vest immediately.

    Additional discretionary matches and/or non-elective contributions may have vesting requiremennts.

    The employer contributions as described meet safe harbor requirements.

    #189560 Reply
    Avatar ID Doc 
    Participant
    Status: Physician
    Posts: 60
    Joined: 02/23/2017
    Disability Insurance

    Oh, got it. Awesome. One less thing to worry about, then. Thanks again!

    #189565 Reply

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