"BMS" <mcfarland[at]yahoo.com> wrote in message
news:A8qdnWns9tzpaVneRVn-rg[at]comcast.com...
- quote -

Plans are considered discriminatory if HCEs benefit significantly more than
non-HCEs. As BMS observed, one reason why non-HCEs benefit less is that
they participate less. Another reason is that they contribute lower
percentages.

BMS's suggestions address this problem, too. You can also increase the
matching rate or altering the formula - people tend to respond accordingly.
For example, instead of matching 30% up to 10% deferral (3%), the company
might match 50% up to 6% deferral - the 3% cap is the same, but this would
add further inducement to start deferrals, and reduce the inducement to
contribute a lot (which HCEs tend to do).

There are safe harbors, if the company is willing to spring for more money.
For instance, the company can unconditionally contribute 3% to everyone's
account (not conditioned on the employees contributing), or can match (100%)
the first 3% contributed, and match (at 50%) the next 2% contributed.
(This is a safe harbor for one of the two nondiscrimination tests; there are
additional requirements for the safe harbor for the other test).

http://www.401khelpcenter.com/cw/cw_...or_401(k).html

The company can also calculate in advance what cap it needs to put on HCE's
contributions to guarantee that the nondiscrimination tests will be
satisfied. That will keep you from having this problem again, but possibly
by severely limiting what you can contribute.

The basic idea in the nondiscrimination tests is that HCEs should not be
contributing, on average, that much more than non-HCEs. For example, if the
average deferral by HCEs were 5%, and by non-HCEs 4%, that would pass one of
the tests. HCEs also should not be getting that much extra matching money
from the company.

This may help you work through the calculations. Or search for ADP and ACP
(actual deferral percentage and actual contribution percentage) tests.
http://www.pfslink.com/irs-testing-requirement.html

--
Mark Freeland
nNeEwTs[at]sonic.net

- quote -

One reason your group failed the test is a low participation rate. If you
are in position to do so, make sure Benefits is running education sessions
and encourage your employer to have automatic enrollment.


<spoca2005[at]yahoo.com> wrote in message
news:1136945423.360608.150160[at]g44g2000cwa.googlegroups.com...
- quote -

In calendar year 2004, I contributed $13,000 (max allowed by IRS) to my
employer-sponsored 401(k). The company match was a modest 30% of the
first 10% (i.e., 3% of the pay). Now, nearly 13 months after the plan
year 2004 was over, I received a notice that I am categorized as a
highly compensated employee (HCE). A number of other people at the
company also received this notice. Our 401(k) has been in existence for
over 10 years and this is the first time it has happened. HR told us
that the company had never failed the determination test before.

I have put a post on misc.taxes.moderated group for tax, penalties,
etc. including whether it is 2004 income (year of contribution),or 2005
income (date of refund check) or 2006 income (the date of notice for
being classified as an HCE, and the date when check was delivered to me
in office).

What financial planning can I do to minimize the impact of the HCE
classification:
-- for year 2004 (anything at all possible?)
-- for year 2005 (taxes not yet filed)
-- for year 2006 (any other options? can I save the money in some
other ways? don't qualify for ROTH IRA)

What can the company do to avoid this kind of problem in future? I
would like to lobby our HR VP, so I would appreciate exact details of
how the test is carried out, and what are the legal ways to avoid this
problem.

Thanks.

SPOCA2005