It seems unfair but unfortunately, those are the rules. There are two
ways of correcting a top heavy plan: (1) return contributions to HCE
employees or (2) give extra matching to non-HCEs to balanced out the
plan. Guess what's cheaper for the company to do? So yes, it makes it
a real hassle -- you will get a big portion of your contributions
back. I'm sure they also return the gains on that portion for that
year so the entire amount becomes taxable income. Basically, the rest
of your coworkers suck by contributing little or nothing. Or your
employer sucks by not offering enough matching to get them to
contribute.

What are your options for 2006? None unfortunately. There's no
retroactive tax shelter you can finagle to count for 2006. Only a
traditional IRA but you won't qualify for it because you are "covered"
by an employer retirement plan and your salary is too high.

For the future, taxable accounts or low-expense variable annuities.
Investments like REITs, bonds, (some) international dividends will get
taxed at income rates so a Vanguard VA might be a good way to defer
tax on the distributions. Low turnover index funds w/ favorable tax
treatments on ltcg and qualified dividends would go under taxable
accounts.

On Feb 4, 2:44 pm, BLC <d...[at]email.me> wrote:
- quote -

My boss told me I am on the verge of being considered a "Highly
Compensated Employee" (HCE) and I need to aware of the HCE guidelines.
He went on to tell me that every year in February HR performs 401k
testing which determines at what salary level a HCE is defined and how
much a HCE may contribute. What confuses me is he said that the testing,
which will happen in February 2007 will determine how much a HCE will be
able to contribute to their 401k in 2006. This seems grossly incorrect
since it would obviously affect your taxes if the testing determined
that a person could only contribute $2000 and they all ready contributed
the maximum of $15,000. Not to mention one would receive a check for
$13,000 in February that could have been invested otherwise. This may
see trivial for someone well within the HCE guideline, but, a person
living in an expensive area of the country, who just falls within the
HCE guideline, and throw in a kid or two, it is much more than just a
trivial matter. (It seems to me that one should be aware of being
classified as an HCE and contribution limit before or early into the
contribution year . . . for example the testing in February 2007 should
be for HCE definition and contribution limits for 2007 using 2006 data.)

After searching the web, I realize there are different guidelines,
including defaulting to a static salary threshold of $100,000 for 2006
and 2007, depending on the chosen 401k provider/plan. Is the $100,000
threshold a "floor" which the annual testing may not fall below?

It seems incorrect that a person who is nearing the HCE threshold could
out-of-the-blue receive a letter and a check saying that the previous
year they were defined as an HCE and here is a check with your excess
contribution. Can anyone confirm and/or elaborate on that?

In my opinion, the standard/core investment strategies include a savings
account at some short-term emergency level, max out your 401k, max out
an IRA (roth if you fall above the deduction limits), sliding in
purchasing a home at some point, and purchasing some life insurance at
some point. If one suddenly becomes classified as an HCE, assuming
minimal maintenance, where should one divert these funds? Are there
alternative plans available? Or, is the next step opening up a brokerage
account and buying mutual funds?

Thanks,
BLC